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DOWNGRADING to UNDERPERFORM (from Neutral) Rating; waiting for potential Global Timber LP re-rating.

Ratings reduction: After share price appreciation of 27% and a total return of 31% YTD, we are downgrading Acadian Timber Corp to Underperform given the negative potential return to our C$12.00 target price. With the stock at an all-time high, we believe the potential for Acadian to form the foundation of a new "Brookfield Global Timber, LP" has more than crept into the stock. Such an event could be a positive catalyst for the shares. Acadian has managed the downturn in a very disciplined fashion. Yet, we believe few positive catalysts exist beyond a meaningful transformation into a much larger entity - a change that carries its own level of associated risks.

Selected issues: Clearly, there are some underlying positives in Acadian's business. Yet, we believe a more robust regional wood demand is necessary to have greater enthusiasm on the shares. Naturally, Acadian is poised to become much larger with the potential acquisition of west coast timberlands from Brookfield Infrastructure Partners. We view that potential deal as rather interesting, but rather difficult for valuation issues along with other factors.

Longer-term value: Generally, we like timberlands assets over an extended period of time. From our perspective, Acadian is well positioned for a market recovery and, in the longer-term, as a potential Brookfield Global Timber LP.

Valuation: We derive our C$12.00 target price by applying a 6.9% dividend yield on current dividend of C$0.825 per share. For perspective, that dividend yield is below the 5-year average of 7.3%, but above the 2-year average of 6.5%. Additionally, the implied price-to-cash flow multiple of the target is roughly 12.5x which is roughly in line with historic levels, but the stock is now at 13.7x. Given the negative potential return on the shares, we downgrade the stock to Underperform from the previous Neutral rating.

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