To: E_K_S who wrote (52326 ) 9/8/2013 12:38:44 PM From: E_K_S Read Replies (1) | Respond to Ainsworth Lumber Co. Ltd. (ANS.TO) Ainsworth Lumber Co. Ltd. (ANSBF) -OTC Markets Louisiana-Pacific: Acquisition Of Ainsworth Is A Leveraged Play To The Housing Market Shareholders in Ainsworth have a few options to tender their holdings. They can elect either for 0.235 shares in Lousiana-Pacific, CAD $1.94 in cash and 0.114 shares in Louisiana-Pacific, or CAD $3.75 in cash pro ration I plan to take half new LPX stock and half cash, converting my high cost shares into cash and keeping my low basis in new LPX shares.Improving Housing And A Major Deal Make Louisiana-Pacific Much More Interesting I see the combined companies growing sales at a long-term rate of 8%, with much of that growth in the next five to six years. I also believe that Louisiana-Pacific can return to the good days of double-digit free cash flow margins, such that free cash flow grows by 15%. As it so happens, I'm building my model on the assumption that Ainsworth's superior margins to come down closer to the industry average, so there could be room for outperformance there. Even so, a free cash flow-based fair value of $23 (including the share dilution and cash spent for Ainsworth) is quite appealing in its own right. The Bottom Line My long-term free cash flow model suggests a fair value of $23, while my EV/EBITDA model (including Ainsworth) says $20 on the basis of a 6.5x forward multiple (and building materials stocks can trade at multiples as low as 4x or 5x in times of pessimism and up to 8x or 9x when the Street is thinking recovery). Both numbers, then, suggest meaningful share price appreciation even on the basis of what I think are pretty conservative estimates and multiples. ----------------------------------------------------------------------- Ainsworth has an attractive product mix, including specialty flooring, oriented strand lumber, insulated structural panels, and products designed for the Japanese construction market (12% of Ainsworth's sales), where it has about 70% to 75% market share in a market where OSB has only about 10% share relative to plywood. Ainsworth is also a low-cost producer - very likely the low-cost producer in North America. This position is due to both large, efficient, and relatively new mills, as well as access to lower-cost fiber. Ainsworth has also been disciplined with its capacity additions, and running its mills at around 90% capacity since 2009 certainly helps (roughly 40% of industry capacity was idle last year, and about 30% so far this year).
