Update: Resolute Forest Products' Pension Liability Continues To Decrease

| About: Resolute Forest (RFP)
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Pension liability continues to contract with a higher discount rate.

Still some downside in worse case scenario, however, the company is likely to reach profitability next year.

Continues to trade for low EV/trailing EBITDA multiple although the company is likely to achieve much more in the future.

As we anticipated, the pension liability was inflated due to the discount rate when we originally wrote about Resolute Forest Products (NYSE:RFP). The pension liability continues to decrease from $1.9 billion in 2012 to $1.15 billion in the latest quarter. We originally anticipated a base case of 50bps increase in the discount rate compared to 2012, which has been low and a 100bps increase which looks to be high as well. We still think that there is room for the pension discount rate to increase whereby the pension liability will further continue to decrease. We think a fair estimate of the size of the pension liability by 2015 will be ~$750 million along with less than $160 million in total pension contributions - less than $25 million in expenses included in operating income.

Taking into account the expected pension liability of $750 million, the full payment of other debts and the liquidation value of assets, the company would roughly fetch $1.1 billion or ~$11.6 per share. That would indicate that the company has ~34% downside from today's prices in the absolute worst circumstances. We still believe that the company will be able to leverage their cost conservative structure and scale to mitigate the declining news print segment and turn a profit.

Resolute continues to have $1.3 billion in deferred tax taxes in Canada that is likely to be totally recognized, which also should lower the current taxable enterprise value. However, it is hard to estimate the net present value of this asset accurately. To be on the conservative side, we would estimate around $140-$150 million, yet could be much higher depending on the company's profitability. At an enterprise value of $1.8 billion shares are actually trading for approximately 5.6x trailing twelve month EBITDA. Looking forward we still believe that the company can continue to drive EBITDA growth with a less severe winter and additional incremental adds to pricing and increased production capacity.

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