By David Berman
After two institutional investors made a $1 billion takeover offer for TimberWest Forest Corp. (OTC:TMWEF) earlier this week, investors have been trying to figure out whether the company is worth more than $6.48 a unit.
So far, the consensus appears to be no, given that the units traded at $6.53 in Toronto on Wednesday afternoon, or less than 1 per cent above the offer. However, some observers believe that the company is worth more – and that the 60-day “go shop” period that allows the timber producer to seek out additional bids will do exactly that.
Daryl Swetlishoff, an analyst at Raymond James, has raised his target price on TimberWest to $7.75 a unit from $7 previously, suggesting another 20 per cent gain over the current level. His reasoning: Monday’s bid from British Columbia Investment Management Corp. and the Public Sector Pension Investment Board values TimberWest at $1,149 an acre, a substantial discount to an average price of $1,602 an acre for U.S. companies.
As well, he believes that TimberWest is capable of generating C$115 million in earnings before interest, taxes, depreciation and amortization, at the high-point of the business cycle. That suggests distributable cash of 71 cents a unit, which implies a yield of 7.9 per cent if the units traded at $9.
So could TimberWest attract a bid that high? The units did trade as high as $18 during the rip-roaring years earlier last decade, but there has been dilution over the past three years as well as a reduction in sustainable harvest levels. Plus, the U.S. housing market is still a shadow of its former self, with a recovery unlikely within the next year. That’s why Mr. Swetlishoff is limiting his target to $7.75 instead.
For existing investors, he believes that waiting will pay off: “We recommend investors wait for strong expected [first quarter] earnings [expected on May 5] and the results of the 60 day ‘Go Shop’ process which has the potential, in our view, to result in a superior competing bid.”