Analyst Actions: Credit Suisse On Norbord - "Earlier Than Expected Industry Restart Ramp-Up a Near-Term Negative For Sentiment"

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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 recovery.

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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Commodities

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