Industry Reports

Deutsche Bank Reports Summaries

080508 Deutsche Bank Report - AbitibiBowater's 1Q in 100 Words

Deutsche Bank - Equity Research

AbitibiBowater Inc {Ticker: ABH, Closing Price: USD 9.43, Target Price: USD 10.00, Recommendation: Hold}.

* Maintaining Hold, trimming price target from $16 to $10

ABH reported a weak 1Q, pointing to an EPS loss of $(3.74) net of special items, significantly worse than DB at $(2.00) and FC at $(2.62).  We are reducing our price target from $16 to $10.  Positives: rising pulp & paper prices and modest valuation on some metrics.  Negatives: declining newsprint demand, weak lumber markets, a strong C$, and medium-term liquidity concerns.  Balanced risk/ reward leads us to keep our Hold rating.

* 1Q fell short of expectations

Improvement in underlying earnings was muted, despite favorable industry price trends in recent months.  The issues included input cost inflation and weaker-than-expected price realizations in newsprint.  Depreciation and interest expense were also both higher sequentially.

* Phase 2 update – no more mill closures . . . for now

Initiatives include potential newsprint conversions into coated and value-added grades, expanded export sales, and further asset sales.  Assets for sale include Korean mill, timber, sawmills, and hydroelectric assets. 

* 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 $260MM in free cash flow at that time.  We place a 6.7x multiple on this and discount the result over 3 years.  We then apply a further discount for the possibility of financial distress.  Other downside risks, as well as some upside risks, are discussed below.