Recently, when looking at the 52 week low list, I was surprised to see Fortress paper (FTP). The last time I came across this business, it was a high flying stock in 2011.
Fortress has had the worst set of luck lately. Their news release page is a great way to get a sense of the timeline of events. While the series of unfortunate events continue, the management remains highly resourceful.
Without going into the very interesting history of this business, let me get right to some numbers.
The book value per share is about $24.50 (Q3 2013), while the stock last closed below $4. The price to book ratio is 0.16. Market is assuming that the book value is going to be severely impacted as the business bleeds cash while waiting for dissolving pulp prices to recover. Market is probably right, but where I disagree is in the degree of the expected loss.
Mr market is very focused on the Canadian dissolving pulp business and seems to be ignoring their Swiss banknotes business.
It must be noted that majority of the assets on the book are locked up in property, plant and equipment; which is hard to unlock, but it is also far less likely to be squandered, unlike cash.
To determine a margin of safety, I performed a private market value analysis of the banknote subsidiary. This business now has a positive EBITDA and has tangible assets marked on the balance sheet at a discount. Furthermore, the intangibles of this business aren't on the balance sheet since they have been developed internally. Intangibles such as patents and customer relationships are incredibly large for this currency printing business. For example, this business is the sole producer of swiss francs in the world. They also print Euros for 10 countries. They own much of the technology behind the security features that are prevalent on modern banknotes.
Even if I assign $0 to the intangibles, I estimate a very conservative $150m for this business.
Now, on to the Canadian dissolving paper mills.
Let us assume an orderly liquidation of their dissolving pulp mills. I assign $100m for Thurso mill and $0 for LSQ mill. On the books there is over $300m of PP&E at these two locations.
Add in cash of $102m and pay down all debt of $227m, and we are left with $125M or 8.59/shr.
Last closing price was $3.9/shr.
Market is saying that this business is worth more dead than alive!
Not that I wish for fortress to liquidate all assets, I know something wonderful can happen if a living business is purchased at half the price of its liquidation value (which is a worst case scenario).
Disclosure: I am an owner of Fortress paper at the time of this post
