Founder, BWS Financial Inc

Hamed Khorsand

Founder

Independent Stock Specific Research

BWS Financial Inc

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Equity Bottom-Up

<ul>
<li>VRS accepting a buyout offer is the best-case scenario for investors.</li>
<li>VRS’s stock is trading at a premium to the $27 a share cash offer on speculation a competing bid might surface. The purchase agreement precludes VRS from soliciting other bids</li>
<li>We are concluding our recommendation by downgrading to Neutral and removing our price target</li>
</ul>


VRS accepting a buyout offer is the best-case scenario for investors.
VRS’s stock is trading at a premium to the $27 a share cash offer on speculation a competing bid might surface. The purchase agreement precludes VRS from soliciting other bids
We are concluding our recommendation by downgrading to Neutral and removing our price target


<ul>
<li>The supply shortage that has plagued the coated paper industry is expected to spill over into 2022. </li>
<li>VRS’s stock is trading at a deep discount to intrinsic value due to management dragging out the process in selling the company </li>
<li>Since the end of the third quarter, there has been tighter availability of substitutes to coated woodfree</li>
</ul>


The supply shortage that has plagued the coated paper industry is expected to spill over into 2022. 
VRS’s stock is trading at a deep discount to intrinsic value due to management dragging out the process in selling the company 
Since the end of the third quarter, there has been tighter availability of substitutes to coated woodfree


VRS: Dragged Out Process Hides Real Value

<ul type="disc"><li>
Verso Corp. (VRS) continued to operate at a more efficient rate than we were forecasting, resulting in higher profitability and cash generation. Demand for coated paper remains ahead of supply allowing VRS to pass through price increases.</li></ul> <ul type="disc"><li>We were not expecting price increases to occur so late in the year since this the time when orders are fulfilled. The industry operating rate remains over 100 percent, which gives room to raise prices.</li></ul> <ul type="disc"><li>VRS’s stock is not trading at the levels we would have expected with the balance sheet’s ballooning cash balance and the Company on pace to exceed $200 million in adjusted EBITDA this year. At the closing price of $23.38, VRS is valued at 2.5 times our 2021 yearend EV to adjusted EBITDA multiple.</li></ul> <ul type="disc"><li>VRS has yet to realize the full benefits of all announced price increases. The timing lag should result in higher 2022 earnings.</li></ul>


Verso Corp. (VRS) continued to operate at a more efficient rate than we were forecasting, resulting in higher profitability and cash generation. Demand for coated paper remains ahead of supply allowing VRS to pass through price increases. We were not expecting price increases to occur so late in the year since this the time when orders are fulfilled. The industry operating rate remains over 100 percent, which gives room to raise prices. VRS’s stock is not trading at the levels we would have expected with the balance sheet’s ballooning cash balance and the Company on pace to exceed $200 million in adjusted EBITDA this year. At the closing price of $23.38, VRS is valued at 2.5 times our 2021 yearend EV to adjusted EBITDA multiple. VRS has yet to realize the full benefits of all announced price increases. The timing lag should result in higher 2022 earnings.

VRS: EV/EBITDA Now 2.5X, Raising PT to $35

<ul type="disc"><li>The peak selling season for coated paper is well underway and industry feedback remains laser focused on sold out conditions and how supply is dwindling not increasing. There was another price increase that occurred at the beginning of October, bringing the year-to-date price increase to as much as 20 percent.</li></ul> <ul type="disc"><li>The current climate continues to support the producers with customers having little room to seek substitutes. Verso Corp. (VRS) stands to benefit from the current business environment to a greater degree than we had been originally forecasting.</li></ul> <ul type="disc"><li>The sold-out conditions have been persistent since the beginning of the year, and substitution is becoming challenging compared to prior cycles.</li></ul> <ul type="disc"><li>We are slightly raising our estimates for the remainder of 2021. Our 2021 adjusted EBITDA is now $190 million from $187 million. We believe our assessment remains conservative to what VRS could report.</li></ul>

The peak selling season for coated paper is well underway and industry feedback remains laser focused on sold out conditions and how supply is dwindling not increasing. There was another price increase that occurred at the beginning of October, bringing the year-to-date price increase to as much as 20 percent. The current climate continues to support the producers with customers having little room to seek substitutes. Verso Corp. (VRS) stands to benefit from the current business environment to a greater degree than we had been originally forecasting. The sold-out conditions have been persistent since the beginning of the year, and substitution is becoming challenging compared to prior cycles. We are slightly raising our estimates for the remainder of 2021. Our 2021 adjusted EBITDA is now $190 million from $187 million. We believe our assessment remains conservative to what VRS could report.

<ul type="disc"><li>The tight supply conditions for coated paper have not dissipated so far through the year leading to Verso Corp. (VRS) and other coated paper producers to raise prices again.</li></ul> <ul type="disc"><li>The latest price increase puts VRS ahead of peak pricing during the cycle of 2018. Without additional supply coming online, demand could deteriorate with further transition to digital media. However, the latest US Postal Service data suggests this is not the case this year.</li></ul> <ul type="disc"><li>The recovery in the coated paper industry affirms our reasoning for VRS being worth more than the current take-out offer of $20 a share.</li></ul> <ul type="disc"><li>Current market conditions are expected to spill over into 2022 as demand remains ahead of supply. VRS’s ability to generate an aggregated $6.80 per share of free cash flow over 2021 and 2022 should result in a stock trading closer to $30.</li></ul>

The tight supply conditions for coated paper have not dissipated so far through the year leading to Verso Corp. (VRS) and other coated paper producers to raise prices again. The latest price increase puts VRS ahead of peak pricing during the cycle of 2018. Without additional supply coming online, demand could deteriorate with further transition to digital media. However, the latest US Postal Service data suggests this is not the case this year. The recovery in the coated paper industry affirms our reasoning for VRS being worth more than the current take-out offer of $20 a share. Current market conditions are expected to spill over into 2022 as demand remains ahead of supply. VRS’s ability to generate an aggregated $6.80 per share of free cash flow over 2021 and 2022 should result in a stock trading closer to $30.

United States

Verso Corporation operates in the paper industry. The Company produces coated freesheet, coated ground wood, and uncoated super calendered papers and pulp. Verso offers its products to magazine and catalog publishers, commercial printers, specialty retail merchandisers, and paper merchants.

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Verso Corp (VRS US)

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We are downgrading to Neutral from Top Pick to close out our recommendation after VRS agreed to be acquired for $27 a share in cash

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