Plum Creek Timber (NYSE:PCL) is a REIT that owns and manages timberlands in the United States. Its products include lumber, plywood, medium density fiberboard, and related by-products, such as wood chips. The company sells its products to wood products retailers, home construction, and industrial customers. PCL is the largest private landowner in the nation with 7.4 million acres of timberlands in the northwest, southern, and northeast US. PCL owns and operates 10 wood product conversion facilities in the northwest.
PCL trades at a compelling discount to underlying net asset value (NAV), generates a fair amount of FCF, and pays a decent dividend. PCL has recently completed a series of large land sales to the government (The Nature Conservancy and Trust for Public Land) and a timberland investment management Group (Campbell Group). Applying the valuation multiples obtained in these deals suggests the NAV of PCL is about 2x higher than the current price. PCL asset value is derived from raw land which traditionally holds its value better than real estate because it is not levered up (no mortgage).
- Recent land deals suggest much higher NAV
PCL has recently completed a series of large land sales to the government (The Nature Conservancy and Trust for Public Land) and a timberland investment management Group (Campbell Group). Applying the average multiple received in 2008 and so far in 2009 I arrive at a NAV of $53 per share after backing out all liabilities. This analysis does not give any value to any of PCL’s additional assets (accounts receivable, investments in grantor trusts, equity investments, etc.) which equal an additional $770m in assets or roughly $4 per share.
- Land values appear to be holding up
Raw land typically holds its value better than real estate during a downturn because it is not levered up with a mortgage. I spoke with a friend of mine that works at a land investment fund who spoke to a land appraiser a few weeks ago regarding mountain forest land that they own and according to the appraiser rural and agricultural land has been holding its value well. So far this has proved true for PCL as $ per acre multiples have held up over the past 15 months. The below chart shows the value per acre in chronological order starting Q1 2008 as well as the magnitude of the acres sold by PCL. Phase II of the Montana Conservation land sales was announced last week so this is not stale data. Even if we apply the lowest multiple received (Q3 Land Sales) the NAV of PCL is $47.50 or 61% of current stock price.
- PCL generates a fair amount of FCF and pays decent dividend
PCL is currently yielding ~6% which is not a homerun but adds a bit to the total return profile of the idea.
- Timber business is weak, but business is still FCF positive
The demand for timber is affected primarily by the level of new residential construction, repair and remodeling activity, and industrial demand. Therefore it is not surprising to see the decline in sales that has taken place over the past 8 quarters. However these businesses still continue to be free cash flow positive and I believe have some value to them. Applying an 8x multiple to PCL’s cash earnings (adding back depletion) I arrive at the timber and manufacturing business being worth $3 per share (down from $10 in Q1 2007).
Land sales have been able to pick up the slack from weak timber demand, in Q4 2008 land sales became the largest segment as measured by revenue. While land sales are clearly not sustainable I think they provide PCL with a way to bridge the current economic malaise.
Segment as % of sales
The dividend looks to be secure assuming PCL is able to complete the land sales they are expecting. If PCL is not able to complete the land sales, the dividend would not be covered by the other two business segments and could be cut. This is the primary risk to PCL in my opinion, however I think this risk is mitigated by the hard asset value of PCL’s land holdings. I think most investors own PCL for the NAV (land) and not the dividend given that it is only around a 6% yield, however a cut in the dividend would almost certainly hurt the stock. Current projections suggest the dividend should be fine in FY 2009.
- Raw land values fall meaningfully.
- PCL is not able to complete the land sales and is forced to cut the dividend.
- Natural disasters such as fires.
- Timber demand remains weak longer than PCL can find buyers for raw land.