paperlinx brokers upgrade to buy

PaperlinX Restores Its Fortunes With Australian Paper Sale
BY CHRIS SHAW @ FN ARENA NEWS - 17/02/2009

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For some time Australian paper merchant and producer PaperlinX (PPX) has struggled with unfavourable market conditions and debt issues but the group appears to have solved most its problems in one go by selling its Australian Paper operations to Japan's Nippon Paper for a total consideration of around $700 million. Around $600 million of the consideration will be a cash payment.

Brokers have responded very favourably to the news and the company has enjoyed a number of upgrades in rating, most of the changes seeing the stock go to a Buy from either Hold or Underperform previously. Credit Suisse is one to make the big jump in rating to Outperform from Underperform, suggesting the deal not only restores the company's financial health but makes it a potential acquisition target.

In the broker's view, the group's balance sheet is now under-leveraged rather than overgeared as was the case before the sale, while ABN Amro notes a number of the group's debt convenants have now been waived. Credit Suisse suggests management can now focus on becoming a global paper merchant and it sees this as a far more attractive option for the company, especially given the company can now consider acquisitions in what remains a fragmented global market.

According to Bank of America-Merrill Lynch, while the current environment for paper merchants is challenging this was already priced into the stock at current levels given the shares prior to the announcement were trading well below their fundamental value.

ABN Amro agrees and expects the stock will close the gap between where it was trading prior to news of the sale and what the shares are actually worth, so like Credit Suisse and Bank of America-Merrill Lynch the broker has upgraded the stock to a Buy on the news and the potential the company can grow in the future.

So too did Citi, though it cautions the sale is not yet a fait accompli and may not go through at all. Assuming the transaction does materialise, Citi also sees it as a good deal for the company. About the only broker not to get excited about the news is JP Morgan, which retains its Underweight rating even allowing for a jump in the share price on the back of the news.

The broker estimated post the sale the stock should trade between 5.5-6.5x times its EV/EBITDA multiple (Enterprise value to earnings before interest, tax, depreciation and amortisation) and this suggests a share price range of $0.65-$0.90.

It appears the broker is pretty close to the mark as in early trading today PaperlinX has traded around the 70c level. Given consensus earnings per share (EPS) forecasts for the company according to the FNArena database are now 8.7c this year and 10.5c in FY10 this suggests a below market share price multiple even given today's share price gains.

As Macquarie noted when cutting its EPS numbers by 20% this year and almost 50% in FY10, the group will generate lower earnings without the Australian paper operations. The group's improved financial health suggests it will look to replace those earnings at some point.

Post news of the sale agreement the average price target on the stock according to the FNArena database is $0.92, which is little changed from before the news. This disguises the fact some significant changes have been made, JP Morgan slicing its target to a more realistic $0.90 from $1.72 but ABN Amro doubling its target to $0.80 from $0.40 previously.

The FNArena database now shows a total of six Buys, two Holds and two Sells, against no Buys, four Holds and six Sells previously.

As expected, shares in PaperlinX today are signifiantly stronger and as at 11.10am the stock was up 38c or more than 100% at $0.705. This compares to a trading range of $0.295 to $2.95 over the past 12 months.