Limitless Paper in a Paperless World
No, I'm not recomending buying stock in The Office's fictional micro-cap paper company, Dunder Mifflin, but I've always found its ad slogan to be hilarious. I am however interested in a company that is in the paper business, well sort of. The Company that I want to talk about today is called Rayonier (RYN).
This "forest products company" does much more than grow and sell wood. It has a "performance fibers" division thatturns wood chips into high-value cellulose specialties used in the manufacture of things like flat panel televisions, computer screens, impact-resistant plastics (acetate), filters, tires, paint, food, pharmaceuticals, and many other consumer products.
So why am I interested in RYN as an investment. My interested in it stems back to a presentation that I saw on the company that was made by Alex Klabin at the Invest For Kids Chicago conference back in November 2012. At the time he believed that RYN was 30% to 60% undervalued and that it could begin to unlock that value thorugh a potential spin-off of its fiber business in 2013 or 2014.
I bought a small position in the company at the time to encourage myself to follow it and to do more research. I still hold that initial position today. the stock has been amlost completely flat since then. Not losing money isn't terrible, but it certainly has not kept pace with the 30%+ increase in the S&P 500. Not long ago I revisited my investment in the company and I decided to add to my holding, making it a normal-sized position in my portfolio.
Much of the inspiration for this increased investment came from a great interview with Kevin Byun of Denali Investors that was published in the recent issue of Columbia University's excellent Graham & Doddsville newsletter. Here's a portion of what Byun had to say about the current opportunity thatRYN presents:
Another one that I’ve been following since last year is Rayonier’s (RYN) upcoming spin-off of its spe- cialty chemical business, Rayonier Advanced Materi- als (RYAM) which is two- thirds of Rayonier’s busi- ness. Most of the cellulose specialties business is in cellulose acetate, which turns wood into the plastic fiber that is used in cigarette filters. It is a very high–margin and attractive busi- ness. I believe it warrants a much higher multiple.
Rayonier is a timber REIT, and the timber REIT investor base is generally seeking dividend yield. There are already several pure plays in the timber space that trade at 3.5% to 4% dividend yields. Rayonier is currently wide of that, despite my belief that its 2.6 million acres of land is of higher quality relative to its peers. But let’s say I’m not a lumberjack and that’s wrong and it is similar quality. Then it should trade in-line with its peers. Well, right now the stock is at roughly and the dividend per share is about $2.
The RYAM spin-off should be valued at roughly $25 to $35 per share post-spin based on my valuation. Based on management comments during a conference call, the dividend yield for RYAM is expected to be 1.5%, which translates very roughly to $0.50 per share on a share price of $25 to $35. Management also stated that the total expected dividend distribution for both entities should be in line with the current dividend of $2 per share. This leaves $1.50 for the parent company to distribute. At a 4% yield, that already puts you in the high $30s. So what does that mean? If the current stock is at $45 and you have the spin-off that I believe is worth at the mid-point $30. That creates a stub of $15 for New Ray- onier which should by itself be worth at least $30 to $40. That’s interesting.
Depending on how the different pieces initially trade we’re talking about two entities together that are incredibly mispriced. The reason is because the exist- ing dividend yield seeking investor base sees this current Rayonier as worst-in-class because of its chemicals business, while the specialty chemicals investors are avoiding it because it’s inside a timber REIT business.
Another interesting wrinkle is that roughly three-fourths of the debt will be moved to the RYAM spin-off. That signals a few things. I believethis was deliberately structured because Rayonier Advanced Materials is a high cash flow business, and will have the ability to de - lever quickly. The initial equity valuation for Rayonier Advanced Materials will be lower due to the initial lev- erage. Interestingly, the Chairman & CEO is going with the spin-off. Lastly, New Rayonier will have the lowest leverage by far among comparables, which will be interesting for strategics. Events will beget events.
A fairly simple investment case with a near-term catalyst that has the potential to cause the stocks to trade significantly higher. Just how I like it.
I'd love to hear others' thoughts on RYN or any other special situations out there. Bear cases are welcome, polite ones of course :).
Thanks for reading. Have a geat day.