Short Thesis on ACCO Brands

Page 1: [1] Deleted Felix Boisse 14-03-23 8:56 PM

Stella Jones Inc.


Stella Jones Inc.


Stella Jones Inc.


Stella Jones Inc.


Stella Jones Inc.


Stella Jones Inc.


Stella Jones Inc.

Page 1: [2] Deleted Felix Boisse 14-03-24 12:14 AM

a


a


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Page 1: [3] Deleted Bowen Qian 14-03-23 11:43 PM

The forest products and building materials industry is cyclical as demand generally fluctuates with the construction cycle. However, 83% of SJ’s revenues are captured in the niche and generally higher margin industry segments of utility poles and railway ties. Demand for utility poles and railway ties is unrelated to economic cycles, and is rather based off replacement and useful lives. The steady-state demand of utility poles in Canada is 240,000 to 350,000 per year; SJ currently sells 125,000 per year. There are virtually no substitutes, therefore, this comprises a very attractive niche for SJ as it commands considerable market share. The railway ties has similar industry dynamics and tailwinds due to growing railroad traffic. The company has resorted to serial acquisitions of small competitors in order to build market share in both industries; these acquisitions have been disciplined and accretive to earnings, constituting a source of shareholder value creation. Management and board of directors’ incentives are highly aligned with shareholders; insiders exert control over 67% of shares outstanding with the CEO himself having options amounting to 2.8% of s/o. The management team also appears very disciplined, focused on cost control and value creation. Therefore, Stella Jones warrants a medium business risk rating. Medium


The forest products and building materials industry is cyclical as demand generally fluctuates with the construction cycle. However, 83% of SJ’s revenues are captured in the niche and generally higher margin industry segments of utility poles and railway ties. Demand for utility poles and railway ties is unrelated to economic cycles, and is rather based off replacement and useful lives. The steady-state demand of utility poles in Canada is 240,000 to 350,000 per year; SJ currently sells 125,000 per year. There are virtually no substitutes, therefore, this comprises a very attractive niche for SJ as it commands considerable market share. The railway ties has similar industry dynamics and tailwinds due to growing railroad traffic. The company has resorted to serial acquisitions of small competitors in order to build market share in both industries; these acquisitions have been disciplined and accretive to earnings, constituting a source of shareholder value creation. Management and board of directors’ incentives are highly aligned with shareholders; insiders exert control over 67% of shares

outstanding with the CEO himself having options amounting to 2.8% of s/o. The management team also appears very disciplined, focused on cost control and value creation. Therefore, Stella Jones warrants a medium business risk rating. Medium














The forest products and building materials industry is cyclical as demand generally fluctuates with the construction cycle. However, 83% of SJ’s revenues are captured in the niche and generally higher margin industry segments of utility poles and railway ties. Demand for utility poles and railway ties is unrelated to economic cycles, and is rather based off replacement and useful lives. The steady-state demand of utility poles in Canada is 240,000 to 350,000 per year; SJ currently sells 125,000 per year. There are virtually no substitutes, therefore, this comprises a very attractive niche for SJ as it commands considerable market share. The railway ties has similar industry dynamics and tailwinds due to growing railroad traffic. The company has resorted to

serial acquisitions of small competitors in order to build market share in both industries; these acquisitions have been disciplined and accretive to earnings, constituting a source of shareholder value creation. Management and board of directors’ incentives are highly aligned with shareholders; insiders exert control over 67% of shares outstanding with the CEO himself having options amounting to 2.8% of s/o. The management team also appears very disciplined, focused on cost control and value creation. Therefore, Stella Jones warrants a medium business risk rating. Medium














The forest products and building materials industry is cyclical as demand generally fluctuates with the construction cycle. However, 83% of SJ’s revenues are captured in the niche and generally higher margin industry segments of utility poles and railway ties. Demand for utility poles and railway ties is unrelated to economic cycles, and is rather based off replacement and useful lives. The steady-state demand of utility poles

in Canada is 240,000 to 350,000 per year; SJ currently sells 125,000 per year. There are virtually no substitutes, therefore, this comprises a very attractive niche for SJ as it commands considerable market share. The railway ties has similar industry dynamics and tailwinds due to growing railroad traffic. The company has resorted to serial acquisitions of small competitors in order to build market share in both industries; these acquisitions have been disciplined and accretive to earnings, constituting a source of shareholder value creation. Management and board of directors’ incentives are highly aligned with shareholders; insiders exert control over 67% of shares outstanding with the CEO himself having options amounting to 2.8% of s/o. The management team also appears very disciplined, focused on cost control and value creation. Therefore, Stella Jones warrants a medium business risk rating. Medium






The forest products and building materials industry is cyclical as demand generally fluctuates with the construction cycle. However, 83% of SJ’s revenues are captured in the niche and generally higher margin industry segments of utility poles and railway ties. Demand for utility poles and railway ties is unrelated to economic cycles, and is rather based off replacement and useful lives. The steady-state demand of utility poles in Canada is 240,000 to 350,000 per year; SJ currently sells 125,000 per year. There are virtually no substitutes, therefore, this comprises a very attractive niche for SJ as it commands considerable market share. The railway ties has similar industry dynamics and tailwinds due to growing railroad traffic. The company has resorted to serial acquisitions of small competitors in order to build market share in both industries; these acquisitions have been disciplined and accretive to earnings, constituting a source of shareholder value creation. Management and board of directors’ incentives are highly aligned with shareholders; insiders exert control over 67% of shares outstanding with the CEO himself having options amounting to 2.8% of s/o. The management team also

appears very disciplined, focused on cost control and value creation. Therefore, Stella Jones warrants a medium business risk rating. Medium









Page 1: [4] Deleted Bowen Qian 14-03-24 12:10 AM

NAV analysis on SJ found some hidden value in land, buildings, operating leases, and customer/supplier relations (Exhibit 5). A sizeable difference comes from the adjustment of land and buildings to reflect a 3% annual growth rate in reproduction costs/inflation. Land was marked up by 20 years while buildings were adjusted by 10 years. Production equipment was adjusted to 80% of gross value due to low technological advancements. A customer relations intangible account was created to reflect the relationships established with suppliers, large customers such as railroads and public utility companies, as well as regulatory bodies. A multiple of 1.0x was applied to customer relations; while SJ operates in a rather commoditized industry, it has unique procurement relationships with suppliers of raw materials as well as strong relationships with large railroads and other recurring customers. The value of long-term debt was left unadjusted as this debt reflects newly issued debt, therefore, the market and book values would be the same. We arrived at NAV per share of $7.48.


7.


7.


7.


since the business •


since the business •


Used average operating margins over the last 3 years instead of 5 years to reflect management’s ability to refocus on higher margin segments.

The zero-growth capex formula, when adjusted for one-time environmental expenditures, resulted in a value significantly lower than depreciation. Therefore, zero-growth capex is assumed to be equal to depreciation.

One-time adjustments were assumed to be zero since the company would have recorded a net gain on these items.





























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[TBU] for valuation realizationy


SJ meets the 3 conditions of growth: real growth in EPS, EBIT and revenue, ROIC is greater than WACC, and competitive advantage is identifiable and sustainable (80%). We believe this advantage is sustainable due to an exceptionally strong and incentivized management team, having drastically improved margins since 2001. Additionally, management has focused on the business on attractive niche industry segments: railway ties and utility poles. Furthermore, SJ has roughly a 50% market share in the Canadian utility poles segments and a cost advantage as a result of strong supplier relations, scale, and a national footprint. Additionally, the national footprint plays an important role in sales, leading to a demand advantage as large customers look for nationwide suppliers. Due to stable growth in the railroad ties and utility poles segment, we decided to use a 3.2% growth assumption based on the real growth rate of the Canadian economy and arrived at VGM of 1.06x and value of growth of $9.06 (Exhibit 8). Since ROIC is barely higher than WACC, value of growth is only slightly higher than EPV. Breakeven value of growth resulted in growth rate of 6.4% and intrinsic value per share of $12.87. We think this growth rate is too high for a mature industry.


SJ meets the 3 conditions of growth: real growth in EPS, EBIT and revenue, ROIC is greater than WACC, and competitive advantage is identifiable and sustainable (80%). We believe this advantage is sustainable due to an exceptionally strong and incentivized management team, having drastically improved margins since 2001. Additionally, management has focused on the business on attractive niche industry segments: railway ties and utility poles. Furthermore, SJ has roughly a 50% market share in the Canadian utility poles segments and a cost advantage as a result of strong supplier relations, scale, and a national footprint. Additionally, the national footprint plays an important role in sales, leading to a demand advantage as large customers look for nationwide suppliers. Due to stable growth in the railroad ties and utility poles segment, we decided to use a 3.2% growth assumption based on the real growth rate of the Canadian economy and arrived at VGM of 1.06x and value of growth of $9.06 (Exhibit 8). Since ROIC is barely higher than WACC, value of growth is only slightly higher than EPV. Breakeven value of growth resulted in growth rate of 6.4% and intrinsic value per share of $12.87. We think this growth rate is too high for a mature industry.


With an intrinsic value with growth of $9.06 we arrive at an entry price of $6.04 using a margin of safety of 33.3%, below the current share price of $14.00 (Exhibit 9). Therefore, we do not recommend a buy. Additionally, we are concerned with the large amount of dilution related to employee stock options, and warrants (7.5 % of shares outstanding).

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Short Thesis on ACCO Brands