KAPSTONE PAPER
AND
PACKAGING CORPORATION
Ticker Symbol: KS
Date: 4/28/2011
By
Raj Dhawle Patil
Rajani Meka
Image: KapStone Investor Presentation, Feb. 2011
COMPANY OVERVIEW
Kapstone manufactures paper packaging and
forestry products
 Headquartered in Northbrook, Illinois
 Sells in domestic as well as International
markets

 Principal
markets: Americas, Europe & Asia
RECENT FINANCIAL HIGHLIGHTS
FISCAL YEAR ENDING DEC.31ST, 2010
Net Sales: $782.2 m; up 24.9%
 Operating Profit: $68.7 m; down 54%
 Net Income: $65 m; down 19%
 EPS: $1.38 per share
 Stock does not pay dividends
 Net Debt: $48 m
 Market Cap: $780.42m

Source: 10-k, fiscal year ending Dec.31st, 2010
GROWTH STRATEGY
Management Team: Roger Stone & Matt Kaplan
In 2007,
acquired the
Kraft paper
business of
International
Paper company
for 155 million
In 2008,
purchased
Kraft paper
business from
MeadWestvaco
for 485 million
Founded in
2005 as a
special
purpose
Acquisition
Corp with
focus on
Paper,
Packaging and
forest
products
Source: http://ir.kapstonepaper.com/phoenix.zhtml?c=190219&p=irol-irhome
In 2009, sold
its Gunnage
bags business
to Illinois Tool
works for 32
million
-All mills are highly efficient and cost effective
-Access to abundant high quality, low cost wood
-Strategically located for exports
-Annual maintenance Capex around $25 to $30 million
Source: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9ODE0NTh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1
PRODUCT MIX

Unbleached Kraft Market

Unbleached Kraft Paper
Linerboard
Saturating Kraft
Unbleached folding carton board

Forest Products





Dimensional Lumber
Timber
-
Images: KapStone Investor Presentation, Feb. 2011
UNBLEACHED KRAFT PAPER
 Market
share of 19%;300,000 tons
 Sold as three main types of products:
Multiwall Paper: Bags for agricultural products, pet food, baking
products, cement & chemicals
 Specialty converting Paper: Wide application in coating and
laminating applications, wraps, end caps and dunnage bags
 Grocery bag & Sack Paper: Bags and sacks for retail, lawn and
leaf, fast food carryout and grocery

Images: Kapstone investor Presentation, Feb 2011
LINERBOARD

Surface facing on corrugated boxes; 565000 tons
Images: Kapstone investor Presentation, Feb 2011
SATURATING KRAFT




Sold under brand name“Durasorb”; 325000 tons per year
Market Leader
Found in high pressure laminates
Products include furniture, shelving, counter tops, medical surfaces,
flooring and industrial laminates for sliding and plywood overlays
Images: Kapstone investor Presentation, Feb 2011
UNBLEACHED FOLDING CARTON
BOARD



Sold under the brand named“Kraftpak”: 110,000 tons
Strong position in Niche market
Uses include beverage, gift boxes, take out cartons, retail food
and quick serve cartons.
Images: Investor Presentation, Feb,
2011
Process
Wood Mill
Boiler
Chemicals
Steam
Woodchips
Digester
Dryer
Paper M/c
SWOT
Strengths
Weaknesses
One of the leading manufacturers of Kraft
LT contracts with customers
Good product Mix
Long Term Contracts with few suppliers
Well positioned in Unbleached Folding
Carton Business
Fluctuations in prices of inputs
Highly Efficient Operations
Dependence on current management
Mills located in excellent wood baskets
L-T contracts with suppliers for inputs
Customer diversification
Opportunities
Threats
Increase in worldwide demand
Volatile commodity prices
Industry towards consolidation
Cyclical industry
High Demand for laminates from Asia
Compliance issues
Shifting of focus on unbleached folding
carton from consumer brands
Recent Stock Performance
Source: http://finance.yahoo.com/q/ta?t=2y&s=KS&l=on&z=l&q=l&p=m20&p=m200&c=^gspc
MARKET OVERVIEW
-Highly Fragmented
-Highly cyclical with product prices fluctuating with input prices
-Undifferentiated products easing the entry of new players
-Moving towards consolidation
-More emphasis on eco-friendly products
-Historical CAGR, 2005-2009: 2%
Source: http://web.ebscohost.com/bsi/pdf?sid=2029ad4a-4dac-45bc-a2b408bf3497f8af%40sessionmgr110&vid=5&hid=122
GEOGRAPHICAL DISTRIBUTION
OF REVENUES
Source: http://web.ebscohost.com/bsi/pdf?sid=2029ad4a-4dac-45bc-a2b408bf3497f8af%40sessionmgr110&vid=5&hid=122
MANAGEMENT DISCUSSION & ANALYSIS

Positive effects of economic recovery




Demand rebounded significantly leading to maximum
operating rates
Paper prices rebounded
Improved product mix due to strong demand for saturated
Kraft products, domestic linerboard and Kraft paper
Benefits from Industry consolidation


Unprecedented level of supply discipline and Inventory
management
Availability of high quality, attractively priced assets
Source: 10-k, Fiscal year ending Dec.31st, 2011
REVENUE/TON
$
6
1
1
R
e
v
e
n
u
e
/
T
o
n
Source: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9ODE0NTh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1
TREND OF PRODUCT SALES
Trend of each product sales as a % of Total Sales
60%
51% 51%
50%
43%
40%
32%
2008
30%
2009
21% 21%
19%
20%
2010
21% 21%
10%
6%
7%
7%
0%
Unbleached Kraft Paper
LinerBoard
Saturating Kraft
Unbleached folding Carton Baord
Source: 10-k, Fiscal year ending Dec 31st,2010
COMPARABLES ANALYSIS
P/E fwd
P/E ttm
EPS
P/B
P/S
Enterprise
Value/
Revenue
Enterprise
Value/
EBITDA
Kapstone
11.29
12.27
1.39
1.87
1
1.06
7.45
International Paper
9.25
20.26
2.7
1.93
0.52
0.79
6.08
Smurfit Stone
11.2
4.8
2.59
1.38
0.58
0.7
7.57
Temple-Inland Packaging
11.21
15.2
1.42
2.67
0.65
0.89
8.47
Rock-Tenn
8.87
12.34
5.86
2.64
0.92
1.26
7.48
Graphic Packaging
11.96
59.78
0.36
2.31
0.45
1.05
7.6
Company Name
Multiples
P/E fwd
Enterprise Value/ Revenue
Enterprise Value/ EBITDA
Share Price
$15.57
$14.08
$17.17
REVENUE GROWTH VS
COGS MARGIN
- The following assumptions are based on Global Economic factors, Industry outlook, Management guidance,
Company’s ability to generate sales and contain costs. However, these assumptions are extremely conservative and
on the assumption that the company would not acquire in the near future.
DISCOUNT RATE
Cost of Equity
15.29%
CAPM:
15.22%
Risk Free Rate 3.40%
Market Risk Premium 6.00%
Beta 1.97
ROE( Historical Average)
15.40%
Cost of Debt
2.00%
Discount Rate : 13.50%
DISCOUNTED CASH
FLOW VALUATION
2011
2012
2013
2014
2015
Net Income
59.39
109.75
166.02
167.33
156.03
D&A
42.17
50.35
51.44
57.11
58.92
Capex
(41.00)
(49.20)
(59.04)
(70.85)
(85.02)
Changes in NWC
(16.16)
(14.01)
(3.53)
(16.82)
(12.89)
Free Cash Flow
44.39
96.89
154.89
136.77
117.05
Terminal Value
1148.17
Total Free Cash Flow
44.39
Enterprise Value
154.89
136.77
$974.40
L-T Debt
115
Shares Outstanding
Share Price
96.89
45.85
$
18.74
Discount Rate
13.50%
Terminal Growth Rate
3.00%
1265.22
UPSIDE POTENTIAL- OPTIMISTIC CASE
-Revenue assumptions on the basis that Kapstone would continue its trend of
acquisitions, and that it makes a single acquisition in 2013 with much lesser
sales growth of 60% compared to 08’s sales growth of over 100%
-COGS have been assumed to fluctuate as its inputs are from a highly cyclical
industry and also based on the new revenue assumptions
- After adjusting CAPEX to account for the acquisition, DCF now gives a price
close to $35
RECOMMENDATION





DCF Range: $14.36 - $35.59, Base Case: $18.74
Triangulated Value: $17.31
Current Stock Price: $16.91
We would like to buy 200 shares at market, but due to
market uncertainty, Recommend Placing on Watch List
Reasons:




Portfolio Diversification
Huge upward potential
Company Analysis: Product differentiation, Good credit rating, Low
debt, Known for increased shareholder value, Experienced
management
Industry Analysis: Growing kraft paper market, Increased demand
CORRELATION
WITH EXISTING PORTFOLIO
Kapstone
AEO
DO
MCD
WAG
JKHY
WFR
Kapstone
1.000
AEO
0.317
1.000
DO
0.371
0.337
1.000
MCD
0.312
0.331
0.341
1.000
WAG
0.296
0.296
0.410
0.373
1.000
JKHY
0.413
0.380
0.478
0.492
0.446
1.000
WFR
0.352
0.403
0.473
0.312
0.268
0.478
1.000
MOS
0.231
0.285
0.427
0.194
0.221
0.314
0.420
MOS
1.000