Real Client Managed Portfolio Memorandum
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From:
Subject:
Date:
Real Client Managed Portfolio Class, Spring-2011
Raj Dhawle Patil, Rajani Meka
KapStone Paper & Packaging Corp. Investment Recommendation
April 29th, 2011
Recommendation: Place on Watchlist
Company Overview:
KapStone Paper and Packaging Corporation (Northbrook, IL) engages in the production and
sale of unbleached kraft, linerboard, saturating kraft, and unbleached folding carton boards in the
United States and internationally. The company offers kraft paper to converters, who produce
multiwall bags for agricultural products, pet food, cement, and chemicals; grocery bags; and
specialty conversion products, such as wrapping paper products and roll wrap. It also offers
linerboard to converters in the corrugated box industry and to other converters for various end
uses including, laminated tier sheets and wrapping material. In addition, the company provides
saturating kraft products used in various industries, including construction, electronics
manufacturing, and furniture manufacturing; and unbleached folding carton board products used
in the general folding carton segment of paperboard packaging.
Recent Performance:
The company operates two highly efficient facilities, one each in North Carolina & South
Carolina, both working at 98% capacity. The unsaturation kraft paper business of the company
has absolute market leadership in a segment with very few competitors and has strong demand
from Asian countries with 80% products being exported to Asia in fiscal year ended Dec 31,
2010. The niche segment of unbleached folding carton also offers tremendous opportunity as
consumer brands are promoting environmental friendly image by using unique low-density virgin
fiber product offered by the Company. The Company posted net sales of $783m for fiscal year
ended Dec. 31, 2010 along with Net Income of $65m.
Growth Strategy:
The Company was formed as a Special Purpose Acquisition Corporation in 2005 by Roger Stone
(CEO- KapStone, Chairman of BoD- International Paper, Inc., formerly CEO of Stone Containers
which merged in 1998 with Jefferson Smurfit to create Smurfit Stone) and Matt Kaplan (Stones
son-in-law & President of KapStone), the paper industry veterans and strong experience in
acquiring paper mfg. assets at attractive prizes. The Company as it stands today, was shaped by
two very successful acquisitions, each one made in 2007 and 2008 respectively. The focus on
valuable acquisition opportunity going forward remains main focus along with increasing
penetration in growing market for Unsaturation Kraft Paper and Unbleached Folding Carton
Boards, backed by strong demand by Asian countries with very few manufacturers in region with
technical expertise to produce the mentioned products.
Recommendation:
We would like to recommend purchase of 200 shares of the stock of the Company at market
price, but recommend placing the stock on the watch list given market uncertainty. The company
is in growth phase and demand for paper packaging products has gone up on the back of
economic recovery pushing paper prices up after long time of stagnancy. Highly competent and
experienced management leads the company with constant focus on value opportunities. The
stock also has insignificant to moderate correlation with other existing stocks in the portfolio,
diversifying portfolio further.