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080228 Deutsche Bank Report - ABH's 4Q in 100 Words

Deutsche Bank - Equity Research

AbitibiBowater {Ticker: ABH, Closing Price: USD 14.63, Target Price: USD 16.00, Recommendation: Hold}.

* Maintaining Hold but reducing price target from $29 to $16 ABH reported a weak 4Q, pointing to an EPS loss of $(2.34) net of special items. However, the result excluded ABY's 3Q results, and we think the pro forma EPS loss was $(2.80), slightly worse than DB at $(2.00) and FC at $(2.50). We are reducing our price target from $29 to $16, but maintaining our Hold rating, based on a balancing of rising pulp & paper prices against liquidity concerns, weak lumber markets, and a strong C$.

* Liquidity is a serious issue on the ABY side $196MM is due on 4/1/08 and $150MM is due on 6/20/08. ABY has $100MM in current liquidity, although $161MM is expected out of Snowflake in April. ABH is trying to refinance, but other options include selling timberlands and/or other assets. We think ABH will find a way to refinance or pay off these near-term maturities.

* Near-term trends appear positive

ABH is looking for at least $100MM in sequential EBITDA improvement in 1Q, and further improvement in 2Q. The positives: (1) higher prices, (2) lower per/unit costs, (3) lower wood products losses, due to massive curtailments, and (4) better paper results, due to 1Q shuts of higher-cost capacity.

* Valuation/risks

We base our valuation on our estimate of Normalized EPS, with a discount applied for the possibility of financial distress. We estimate that ABH will reach Normalized EPS in 4 years and generate $275MM in free cash flow at that time. We place an 8x multiple on this and discount the result over 3 years. We then apply a further discount for the possibility of financial distress. Risks: downside:near-term liquidity, continued decline in newsprint demand; upside: potential refinancing of near-term maturities, the improvement of credit markets, capacity rationalization leading to higher prices. (See page 2-3 for details.)