1. Kapstone Paper and Packaging Corporation
Ticker Symbol: KS
Date: 4/28/2011 By
Raj Dhawle Patil
Rajani Meka
Image: KapStone Investor Presentation, Feb. 2011

2. Company Overview
Kapstone manufactures paper packaging and forestry products
Headquartered in Northbrook, Illinois
Sells in domestic as well as International markets
Principal markets: Americas, Europe & Asia

3. Recent Financial Highlights fiscal year ending dec.31st, 2010
Net Sales: $782.2 m; up 24.9%
Operating Profit: $68.7 m; down 54%
Net Income: $65 m; down 19%
EPS: $1.38 per share
Stock does not pay dividends
Net Debt: $48 m
Market Cap: $780.42m
Source: 10-k, fiscal year ending Dec.31st, 2010

4. Growth Strategy Management Team: Roger Stone & Matt Kaplan
Founded in 2005 as a special purpose Acquisition Corp with focus on Paper, Packaging and forest products
In 2007, acquired the Kraft paper business of International Paper company for 155 million
In 2008, purchased Kraft paper business from MeadWestvaco for 485 million
In 2009, sold its Gunnage bags business to Illinois Tool works for 32 million
Management Team: Roger Stone & Matt Kaplan
Source:

5. -All mills are highly efficient and cost effective
Access to abundant high quality, low cost wood
Strategically located for exports
Annual maintenance Capex around $25 to $30 million
Source:

6. Product Mix Unbleached Kraft Market Forest Products
Unbleached Kraft Paper
Linerboard
Saturating Kraft
Unbleached folding carton board
Forest Products
Dimensional Lumber
Timber
Images: KapStone Investor Presentation, Feb. 2011

7. Unbleached Kraft Paper
Market share of 19%;300,000 tons
Sold as three main types of products:
Multiwall Paper: Bags for agricultural products, pet food, baking products, cement & chemicals
Specialty converting Paper: Wide application in coating and
laminating applications, wraps, end caps and dunnage bags
Grocery bag & Sack Paper: Bags and sacks for retail, lawn and leaf, fast food carryout and grocery
Images: Kapstone investor Presentation, Feb 2011

8. Linerboard Surface facing on corrugated boxes; 565000 tons
Images: Kapstone investor Presentation, Feb 2011

9. Saturating Kraft Sold under brand name“Durasorb”; 325000 tons per year
Market Leader
Found in high pressure laminates
Products include furniture, shelving, counter tops, medical surfaces, flooring and industrial laminates for sliding and plywood overlays
Images: Kapstone investor Presentation, Feb 2011

10. Unbleached folding carton board
Sold under the brand named“Kraftpak”: 110,000 tons
Strong position in Niche market
Uses include beverage, gift boxes, take out cartons, retail food and quick serve cartons Images: Investor Presentation, Feb, 2011

11. Process Digester Wood Mill Boiler Chemicals Woodchips Steam Dryer
Paper M/c

12. SWOT Strengths Weaknesses One of the leading manufacturers of Kraft
LT contracts with customers
Good product Mix
Long Term Contracts with few suppliers
Well positioned in Unbleached Folding Carton Business
Fluctuations in prices of inputs
Highly Efficient Operations
Dependence on current management
Mills located in excellent wood baskets
L-T contracts with suppliers for inputs
Customer diversification
Opportunities
Threats
Increase in worldwide demand
Volatile commodity prices
Industry towards consolidation
Cyclical industry
High Demand for laminates from Asia
Compliance issues
Shifting of focus on unbleached folding carton from consumer brands

13. Recent Stock Performance
Source:

14. Market Overview Highly Fragmented
Highly cyclical with product prices fluctuating with input prices
Undifferentiated products easing the entry of new players
Moving towards consolidation
More emphasis on eco-friendly products
Historical CAGR, : 2%
Source:

15. Geographical Distribution of Revenues
Source:

16. Management Discussion & Analysis
Positive effects of economic recovery
Demand rebounded significantly leading to maximum operating rates
Paper prices rebounded
Improved product mix due to strong demand for saturated Kraft products, domestic linerboard and Kraft paper
Benefits from Industry consolidation
Unprecedented level of supply discipline and Inventory management
Availability of high quality, attractively priced assets
Source: 10-k, Fiscal year ending Dec.31st, 2011

17. Revenue/Ton $611 Reve nue/Ton
Source:

18. Trend of Product Sales Source: 10-k, Fiscal year ending Dec 31st,2010
Future of these products
Source: 10-k, Fiscal year ending Dec 31st,2010

19. Comparables Analysis Company Name P/E fwd P/E ttm EPS P/B P/S
Enterprise Value/ Revenue
Enterprise Value/ EBITDA
Kapstone
11.29
12.27
1.39
1.87 1
1.06
7.45
International Paper
9.25
20.26
2.7
1.93
0.52
0.79
6.08
Smurfit Stone
11.2
4.8
2.59
1.38
0.58
0.7
7.57
Temple-Inland Packaging
11.21
15.2
1.42
2.67
0.65
0.89
8.47
Rock-Tenn
8.87
12.34
5.86
2.64
0.92
1.26
7.48
Graphic Packaging
11.96
59.78
0.36
2.31
0.45
1.05
7.6
Multiples
P/E fwd
Enterprise Value/ Revenue
Enterprise Value/ EBITDA
Share Price
$15.57
$14.08
$17.17

20. Revenue Growth Vs COGS Margin
- The following assumptions are based on Global Economic factors, Industry outlook, Management guidance, Company’s ability to generate sales and contain costs. However, these assumptions are extremely conservative and on the assumption that the company would not acquire in the near future.

21. Discount Rate Cost of Equity 15.29% CAPM: 15.22% Risk Free Rate 3.40%
Market Risk Premium
6.00%
Beta
1.97
ROE( Historical Average)
15.40%
Cost of Debt
2.00%
Discount Rate : 13.50%

22. Discounted Cash Flow Valuation
2011
2012
2013
2014
2015
Net Income
59.39
109.75
166.02
167.33
156.03
D&A
42.17
50.35
51.44
57.11
58.92
Capex
(41.00)
(49.20)
(59.04)
(70.85)
(85.02)
Changes in NWC
(16.16)
(14.01)
(3.53)
(16.82)
(12.89)
Free Cash Flow
44.39
96.89
154.89
136.77
117.05
Terminal Value
Total Free Cash Flow
Enterprise Value
$974.40
L-T Debt
115
Shares Outstanding
45.85
Share Price $
Discount Rate
13.50%
Terminal Growth Rate
3.00%

23. UPSIDe potential- Optimistic Case
Revenue assumptions on the basis that Kapstone would continue its trend of acquisitions, and that it makes a single acquisition in 2013 with much lesser sales growth of 60% compared to 08’s sales growth of over 100%
COGS have been assumed to fluctuate as its inputs are from a highly cyclical industry and also based on the new revenue assumptions
After adjusting CAPEX to account for the acquisition, DCF now gives a price close to $35

24. Recommendation DCF Range: $14.36 - $35.59, Base Case: $18.74
Triangulated Value: $17.31
Current Stock Price: $16.91
We would like to buy 200 shares at market, but due to market uncertainty, Recommend Placing on Watch List
Reasons:
Portfolio Diversification
Huge upward potential
Company Analysis: Product differentiation, Good credit rating, Low debt, Known for increased shareholder value, Experienced management
Industry Analysis: Growing kraft paper market, Increased demand

25. Correlation with existing portfolio
Kapstone
AEO DO
MCD
WAG
JKHY
WFR
MOS
1.000
0.317
0.371
0.337
0.312
0.331
0.341
0.296
0.410
0.373
0.413
0.380
0.478
0.492
0.446
0.352
0.403
0.473
0.268
0.231
0.285
0.427
0.194
0.221
0.314
0.420