Some more news.
Peter
by Robert Metz
Listen to Robert Metz's comments in Money Clips
Reminder: Please wait for the entire page to load before printing.
Future Stock? Kafus Environmental and the Freeway to the Bottom Line
May 26, 1998 -- How's this as a formula for success? Kafus Environmental Industries (AMEX: KS) ties up a Canadian government-developed process for making medium density wood fiber whose raw materials are wood pallets and other wood waste for which Kafus pays little if anything at all.
Rival manufacturers use lots of "green wood" with a much higher water content so their MDF reportedly costs more. They also use a noxious formaldehyde compound and Kafus reportedly does not. Kafus' fabrication process is cheaper for these and other reasons. Considering Kafus' low costs, its high quality fiber may fly.
The company is building two U.S. plants to make its wood fiber using non-recourse debt. Will this formula create a Future Stock for the Canadian-based firm?
Michael A McCabe, the president of Kafus, says yes. He came to my digs to tell me about his company. It has traded at 4-1/2 of late. The 52-week high was 6-3/8s, the low, 1-1/2. He thinks the fiberboard business will bring big profits soon. The MDF fiberboard is one of several environmental angles to this developing company. McCabe didn't blink as I reviewed the Future Stock concept as laid out in my book 15 years ago -- 10-fold profits in 10 years.
McCabe, a former investment banker, takes credit for the financing plans by which a company operating subsidiary, 86 percent owned CanFibre Group, will own and operate the plants, but is not directly accountable for the plant debt. Two U.S. plants, one in California and one in New York State, are being financed with municipal bonds and/or taxable bonds, some of which may be converted to munis.
Kafus has some impressive partners in California: Merrill Lynch has raised $120 million for the new MDF manufactory soon to be operational in Riverside, Calif. The plant is being built by Stone & Webster under a lump sum contract.
McCabe says the California site has contracts in place that guarantee both waste wood supply and the purchase of the plant's full output for the next 20 years. In all, Kafus hopes to build five MDF plants in North America in four years. On April Fool1s Day, the Wall Street Journal quoted unnamed experts to the effect that there are 1.5 billion pallets in the U.S. Forty percent of domestic hardwood lumber -- oak, maple and the like -- goes into pallets and this accounts for 27 percent of U.S. lumber production. And that1s no joke. To Kafus it sounds like opportunity.
The California CanFibre plant is designed to produce 78.5 million square feet of medium-density fiberboard per year, and is scheduled to open in July. MDF has been produced in Canada for decades and for a quarter of a century in the U.S. What is said to make this plant special is a "patented steam injection system" developed by a research group funded by the Canadian government and private industry. McCabe told me his people bought the process cheap when there were no other takers. His company will pay royalties to the research group based on the output of the plant(s).
The process is unique in that it uses wood waste only. The plant operators can harvest the "urban forest" of waste that clogs landfills, including the distressingly common worn wooden pallets spawned by the nation's high consumption habits. They turn the material into doors and cabinets like the ones in modern kitchens.
Normally, MDF is made from virgin fiber. Producers harvest their own timber or locate near sawmills. They grind wood to "finely milled fibrous strands," mix it with formaldehyde glue and cure it between hot metal rollers. McCabe says the panels don't cure evenly and some surface over curing also results. Over-cured layers have to be sanded off at a significant cost in energy and production time.
Riverside's patented steam injection process creates "uniform panels" that are said to cure up to 50 percent faster. The process's phenolic formaldehyde-based resins let the plant rely solely on recycled wood and are "environmentally benign."
"Because of our technology ... we produce more board more efficiently. We are the industry's low cost producer. Our steam injection process cuts costs to $350 per thousand square feet of board. It costs our rivals $1,000 to $1,500 to produce that much product turned out for the same markets," McCabe said, and added that his product is better. It is more moisture resistant, he said, adding that it commands twice the price of the competition's similar class MDF product. He adds that his MDF can be used where his rivals' product is unacceptable. He cited this example: CanFibre's MDF is sufficiently fire-resistant for use in new hotel doors in Las Vegas.
I asked McCabe how he figured his company's stock could provide 10 for one gains in 10 years time. He said, "We will have five MDF Plants by the year 2001 with revenues of about $250 million." Nevertheless, Kafus has no revenues as yet. With the stock at $4.50 and 24 million shares out, market cap is already $108 million. But McCabe believes the five plants operating by 2001 will have revenues of about $250 million. Of that, he thinks roughly $100 million will reach the bottom line.
Based on those by-no-means-certain profits four years out, if the shares commanded at a modest price earnings ratio of 15, the stock would sell at $45.
All of those numbers are exclusive of Kafus' participation in other ambitious ventures. Kafus cultivates kenaf, a fast-growing plant of the hibiscus family with a hemp like exterior and a woody core. Kafus's wholly owned Kenaf Industries has recently completed a multi-million dollar expansion and improvement of its fiber processing plant in South Texas. The plant is said to process 35,000 tons of kenaf stalks yearly. The material is considered suitable for a range of natural fiber items.
The plant's inner fiber can become absorbent newsprint. (Woodsman! Spare that tree!) McCabe showed me a color section of a Texas newspaper made of the fiber. The outer fiber is substituting for fiberglass in composite panels for car doors.
Kafus has a joint venture that is producing fiber cement board with Temple Inland Forest products. The product resembles cement shingles which can be painted, textured, cut and used as moisture- fire- mildew- and termite-resistant shingles. That plant is presently under construction. It is to be operational this year.
So what could go awry? Foster Wheeler Environmental did a feasibility study on CanFibre. CanFibre's numbers show MDF's price per thousand square feet rising from $421 in 1999 to $633 in 2008, and that of the fire-resistant variety from $951 to $1,163 in the same period. On that basis, the plant would cover debt service from 1.90 times to 3.08 times. But if for some reason CanFibre cannot produce the more profitable fire retardant MDF, debt service coverage slips significantly to 1.47 times in 1999. In a case showing the effects of higher-priced waste wood feed stock -- not $5 a ton, but rising from $53.50 a ton in 1999 to $144 a ton in 2008, debt service is still covered. But a sustained drop in finished prices of 25 percent or more with no offsetting reduction in costs would bring a serious cash flow deficiency, Foster Wheeler showed. But that kind of price drop has not occurred since before 1980.
--------------------------------------------------------------------------------
Disclaimer: This report is for informational purposes only and in no way should be taken as a recommendation to purchase or sell the securities mentioned in this report. Stocks rise and fall due to the normal fluctuations of the market, as well as in accordance with unforeseen events and news announcements. Any investments made in any securities mentioned in these reports are the sole liability of the investor.
|
