(By Mani) Shares of Fortress Paper Ltd. (TSX: FTP) should slowly but steadily move higher in value over the next 12–18
months as the company demonstrates it is successfully ramping production
at its Thurso mill, as well as making progress converting the
Over the next 18 months, Fortress, a producer of dissolving pulp,
specialty paper and security paper. is set to become a top-10 global
producer of dissolving pulp with a capacity of 450,000 tons per year.
The company is currently ramping up
dissolving pulp production at its Thurso mill, which has a capacity of 200,000 tons
per year. In mid-2014, it is expected to commence dissolving pulp
production at its second dissolving pulp mill in Lebel-sur-Quevillon
(LSQ), which has a capacity of 250,000 tons per year. Once both mills in Quebec are
fully ramped, Fortress will be the seventh-largest global producer of
"The main impetus for an improved
valuation of Fortress shares in the next two years will be driven by a
building confidence in the company's operational capabilities, rather
than relying on market dissolving pulp pricing to move the shares," CIBC
analyst Mark Kennedy said in a client note.
In addition, dissolving pulp is poised
for long-term growth, driven by strong textile demand. Global textile
demand is forecast to grow from 82 million tons in 2011 to 106 million
tons in 2020 and to the 150 million ton range by 2030. The demand
will open up a fiber gap that viscose dissolving pulp is positioned to
If cotton has limited potential to expand
its annual production volumes , then the disproportionate share of
demand growth for comfort fibers with the required moisture management
properties will fall to cellulosic fibers.
"This is why we see dissolving pulp
demand growing from 4.7 million tons in 2011 to as much as 13.5
million tons in 2020 and possibly as much as 25 million tons in
2030," Kennedy noted.
The valuation on Fortress is attractive
provided the company executes in dissolving pulp. Fortress is only now
emerging as a producer of dissolving pulp and will not hit its full
stride for another 24 months.
"It is a stock that looks fully priced
against its peers based on 2012 estimated EBITDA, but is among the least
expensive names we cover looking forward to mid-cycle EBITDA with both
Thurso and LSQ in full production," the analyst said
The reason for this valuation gap is the
fact that Fortress is the newly arrived dissolving pulp producer that
needs to establish its credentials with respect to running reliable
"We expect this will be forthcoming with
time and that this valuation gap will begin to narrow as the company
executes on the operational front," Kennedy added.