Re-start ramp-up: In a rather surprising announcement,
Georgia-Pacific will begin a ramp-up of the Clarendon County, SC
oriented strand board facility in Q1 2013. There was no timeline on
reaching a full level of production. The commissioning of a mill
that was not previously operational may take roughly 6-12 months.
Yet, there may be a longer period of time before higher quality OSB
is running off the line. From our perspective, the restart
announcement is only a little bit earlier in time than our
expectations. Clearly, the sentiment shifted negatively on this
news flow, however, we continue to view an improving US housing
market and above trend OSB prices as keys for NBD.
Market size: The Clarendon mill is roughly 850MMsf of capacity.
Based on some industry data, total North American OSB capacity is
28 Bsf of which approximately 65% is operating and the remainder
was previously curtailed. Therefore, this restart consists of 3% of
total capacity and approximately 4.5% of operating capacity. From
our perspective, the logical mills to restart first are the new
mills that never operated. Clarendon falls into this category.
There are two more mills in this group each with a similar amount
of capacity. Tomorrow's US housing data should continue to
highlight positives, but well below long-term trends. Therefore, we
believe the OSB market is positioned for ongoing improvements,
however, there are likely to be some bumps along the road - both
positive and negative for industry players like NBD.
Investment thesis: We believe Norbord faces positive momentum in
core markets that should translate into improving financials.
Underlying the expected improvement is a gradual US housing market
Valuation: Our target price and Outperform rating are supported
by our DCF analysis, among other valuation approaches, including:
implied P/E of 16.8x on 2013; and, EV/EBTIDA: 8x and 6.5x on 2013
and 2014, respectively.
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