Monday, November 28, 2005

Abitibi (ABY)

Somewhat surprised to see this outperform rating on Abitibi (ABY). The valuation of the business on an EV to EBITDA basis is beguiling at about 5 times. The upgrade seems to be related to the sale of the 50% holding in its PanAsian subsidiary for $600 million in cash thereby reducing the near-term financial risk. Post deal, debt net of cash, will still represent about 60% of total capital.

Looking back, the company has failed to generate any free cash flow in some time. On a TTM basis, FCF was negative $85 million. In the last two years, CFFO has averaged about $50 million annually, however, cash interest unfortunately has averaged about$315 million!

Most newspapers are switching to lighter weight newsprint and reducing their width to tabloid formats. The Wall Street Journal has done so already in its Asian and European editions and will follow this in North America. The NY Times is proposing lighter weight newsprint as well.

It seems to me that the newsprint industry remains in decline especially in the developed world. Abitibi has just sold off its only growth opportunity in my view. Though management should be commended for the price it received and the rescue of the balance sheet, what remains is a declining business that is subject to the current high valuation of the Canadian dollar. The Canadian dollar acting as a petro-currency does little to improve the future of the Canadian newsprint industry.


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