Global Special Situations & Strategy, SR Services Ltd

David Lepper

Global Special Situations & Strategy

SR Services Ltd

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<h2>Strategic M&amp;A doesn’t dampen the outlook</h2>■ <a href="https://www.smartkarma.com/entities/528" target="_blank" data-smartkarma-citation="entities:528:1">Nine Dragons Paper Holdings (2689 HK)</a> (NDP) has announced the acquisition of two mills from Catalyst paper for US$175m, providing it access to production in North America (closing expected end of Q2'18). The multiple announced implies a Price to Book of 2.7x, which we note is lower than the recently announced DS Smith’s acquisition of Europac for 3.84x. ■  Plant Financials: The NPAT for the mills in 2017 was circa US$4.1m, but seemingly they have posted a healthy uplift with Q1 2018 reporting US$5.9m. Hence, the overall inclusion is small for now.  We feel the consensus outlook will remain largely unchanged.■  Acquisition creates minimal changes to NDP’s forecasts and therefore consensus: Given the acquisition is small, it will be down to what NDP can do with these mills in the medium term. Moreover, the reality is that the acquisition lifts NDP’s gearing by c4% to 79% and 55% for 2018 and 2019 respectively on a net debt to equity basis. With forecasts pointing to some already strong numbers for 2019, the adjustment is down to the funding only and its impact on the balance sheet is limited. As a result, our outlook remains unchanged in terms of NPAT and our expectation that consensus is likely to remain unchanged.■  It is the strategic nature of this acquisition, which is key: Review of the acquisition highlights it is an opportunistic bolt-on, which makes strategic sense for several reasons. In the near term, not only is geographic exposure to the US market provided, but it grants NDP access to virgin fibre sources. Longer term, we believe it should provide a low-risk approach to enacting a bigger global strategy. The opportunistic bolt-on acquisition was something we flagged in our note 10th May Note <a href="https://www.smartkarma.com/insights/notes-from-the-silk-road-nine-dragons-paper-holdings-2689-hk" target="_blank" data-smartkarma-citation="insights:20131">Notes from the Silk Road: Nine Dragons Paper Holdings (2689.HK)</a>.■  Positive bias maintained.  NDP is well positioned to benefit from China’s Dirty Industry Initiative (as well as the anti-plastic push globally) and demand from Online shopping. This is supported by a positive ASP environment for paper products globally, which is being driven by good product demand and tight capacity as a result of the industry holding back investment in recent years.

Strategic M&amp;A doesn’t dampen the outlook■ Nine Dragons Paper Holdings (2689 HK) (NDP) has announced the acquisition of two mills from Catalyst paper for US$175m, providing it access to production in North America (closing expected end of Q2'18). The multiple announced implies a Price to Book of 2.7x, which we note is lower than the recently announced DS Smith’s acquisition of Europac for 3.84x. ■  Plant Financials: The NPAT for the mills in 2017 was circa US$4.1m, but seemingly they have posted a healthy uplift with Q1 2018 reporting US$5.9m. Hence, the overall inclusion is small for now.  We feel the consensus outlook will remain largely unchanged.■  Acquisition creates minimal changes to NDP’s forecasts and therefore consensus: Given the acquisition is small, it will be down to what NDP can do with these mills in the medium term. Moreover, the reality is that the acquisition lifts NDP’s gearing by c4% to 79% and 55% for 2018 and 2019 respectively on a net debt to equity basis. With forecasts pointing to some already strong numbers for 2019, the adjustment is down to the funding only and its impact on the balance sheet is limited. As a result, our outlook remains unchanged in terms of NPAT and our expectation that consensus is likely to remain unchanged.■  It is the strategic nature of this acquisition, which is key: Review of the acquisition highlights it is an opportunistic bolt-on, which makes strategic sense for several reasons. In the near term, not only is geographic exposure to the US market provided, but it grants NDP access to virgin fibre sources. Longer term, we believe it should provide a low-risk approach to enacting a bigger global strategy. The opportunistic bolt-on acquisition was something we flagged in our note 10th May Note Notes from the Silk Road: Nine Dragons Paper Holdings (2689.HK).■  Positive bias maintained.  NDP is well positioned to benefit from China’s Dirty Industry Initiative (as well as the anti-plastic push globally) and demand from Online shopping. This is supported by a positive ASP environment for paper products globally, which is being driven by good product demand and tight capacity as a result of the industry holding back investment in recent years. 

Notes from the Silk Road: Nine Dragons Paper Holdings (2689.HK) - Strategic M&A

Spain

Papeles y Cartones de Europa, S.A. (Europac) produces corrugated paper.  The Company also manufactures corrugated boxes and generates electricity for its own needs.  Europac has manufacturing plants throughout Spain, Portugal and France.

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Papeles Y Cartones De Europa S (PAC SM)

Notes from the Silk Road: Nine Dragons Paper Holdings (2689.HK) - Strategic M&A

Strategic M&A doesn’t dampen the outlook■ Nine Dragons Paper Holdings (2689 HK) (NDP) has announced the acquisition of two mills from Catalyst...

David Lepper

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