Financial Analysis

The valuation model presented in this website is a simplified model built in Microsoft Excel, but it captures the critical components of any discounted cash flow valuation. These components, or value drivers, are sales growth; operating profit margin (which is a pre-tax, pre-interest measure); effective tax rate; fixed capital investment; working capital investment; and the discount rate or weighted average cost of capital (WACC) as well as the value growth duration. In addition, the model has inputs for depreciation and interest expense.

I have started with RYAMs historic numbers for the years from 2014 to 2020, representing the period that RYAM has had an existence as a stand-alone company, as presented in their annual reports and 10-K regulatory filings, and for the first half of 2021 I have taken the numbers from their 10-Q filings.

I have then developed an estimate for the balance of 2021 and a forecast for the years from 2022 to 2025 to give a total of seven years of history and five forecast years.

Sales Growth

The sales numbers in the forecast period have been arrived at by estimating the volumes produced of both specialty and commodity grade HPC and their average sales prices.  

The real focus of interest is on the sales and volume mix for the HPC business, and the historic numbers show a steady decline in the average blended price achieved by RYAM. From 2014 to 2020 inclusive RYAM saw a compound annual growth rate of negative 6% in the average blended price it achieved for its HPC products.

RYAM has a total stated production capacity of 1,020,000 tonnes from its mills at Fernandina Beach, Jessup, Tartas and Temiscaming. Historically, utilisation rates have averaged 95%, with a high of 98% in 2015 and a low of 90% in 2018.  The leap in production in 2018 was due to the acquisition of Tembec and not to internal growth.

With total sales of just 421,000 tonnes of HPC in the first 6 months of 2021 representing a utilisation rate of just 83%, I have given RYAM the benefit of every doubt going and assumed that they are able to sell 509,000 tonnes in the 2nd half of 2021, for total 2021 sales of 930,000 tonnes. This represents. A theoretical 99.8% utilisation rate for H2 2021, with a total annual utilisation rate for 2021 of 91%, which appears unlikely, but without this level of production recovery, the picture painted would look even bleaker than it already does. 

Specialty Grade HPC Volumes

RYAM are signalling that in 2021 specialty volumes are expected to be up on the prior year and that total volumes are likely to be down, meaning that commodity volumes will likely be down on the prior year. The model reflects this, and I have increased specialty volumes by 5% to 540,000 tonnes, while commodity volumes are projected to fall by 15% to 390,000 tonnes.

From 2022 onwards I have forecast specialty production to level off at 560,000 tonnes, with commodity production at 420,000 tonnes. This sees RYAM producing 980,000 tonnes per year with a 96% utilisation rate. That is more tonnage than RYAM has ever produced in a single year and is a tall order, but it is putting the best possible gloss on RYAM’s prospects. It should be noted that to maintain these levels of production will require significant levels of capital investment and given RYAM’s management’s history of under-investment and poor investment choices, this seems unlikely.

Commodity Grade HPC Volumes

Specialty Grade Prices

Prices for specialty grades are anticipated to soften slightly in 2021, but I am forecasting a strengthening of prices in 2022 to $1,400 per tonne, and staying at that level until 2025, this is higher than in any year since 2017 and once again this is almost certainly overstated, but it avoids any suggestion that I am deliberately talking down RYAM’s prospects.

Commodity Grade Prices

Commodity prices seem likely to be stronger year on year in 2021 and again I have put the best possible gloss on RYAM’s potential performance, forecasting an $870 per tonne price in 2021 and $900 in 2022 and beyond. This compares with the average historic price achieved by RYAM from 2014 to 2020 of $705 per tonne.

By-Product Sales

For by-product sales, there is no information provided in the 2021 10 Qs and I simply projected the 2020 figure forward. 

Paperboard Sales

Paperboard sales in the first half of 2021 totalled $105 million, and I doubled this for the full year to $210 million and then projected this forward.

High Yield Pulp Sales

The numbers for Pulp and Newsprint from 2017 to 2020 include both High Yield Pulp and Newsprint but following the sale of the Newsprint business in 2021, the forecast shows only estimated high-yield pulp sales.

Other Sales & Eliminations

Other sales and eliminations in the first half of 2021 totalled -$15 million, and I simply doubled this for the full year to -$30 million and then projected this forward. This reflects only eliminations going forward.

Cost of Goods Sold

Cost of sales have been running at high levels since the Tembec acquisition and 2021 looks like being another costly year, I am forecasting COGS at 93% of sales, compared with an average of 95% in the prior two years, and thereafter declining by 1% a year through to 2025, ending up at 89%. Taken together with the operating costs, set out below, this results in an operating margin of 1% in 2021 increasing to 6% in 2025. Again, this seems to me to be generous to RYAM, where operating margins have been in negative territory in both 2019 and 2020.  

Operating Costs

For operating costs, I have assumed the same level of 6% of sales in 2021 and 2022 as in 2020, dropping to 5% in 2023 and thereafter.

Effective Tax Rate

The effective tax rate is forecast at 20%. RYAM’s effective tax rate has fluctuated wildly over the past several years with disposals and acquisitions obscuring the underlying position of the company.

Fixed Capital Investment

Fixed capital investment has averaged 7% of sales over the historic period, I have assumed 6% for the forecast period, but there is a potential disconnect here, Improved sales numbers combined with generous assumptions regarding cost of goods sold and operating costs, all point to significantly higher levels of capital investment and my 6% number is almost certainly too low. However, once again I have given RYAM the benefit of the doubt.

Working Capital investment

Working capital investment is forecast to remain zero throughout, in line with constant sales and reducing costs.

Interest Rate

The interest rate doesn’t directly impact the valuation but it reflects RYAM’s debt burden and is required to determine the profit numbers. I have taken the 2020 percentage and projected it forward.

Depreciation

Depreciation is a non-cash expense and is reflected mostly in cost of sales, it doesn’t impact the valuation, but it does affect the EBITDA number. I have assumed 7% for 2021 onwards.

Weighted average cost of capital / discount rate

I have used a 9% cost of capital. RYAM’s beta is 3.75 and with interest rates likely to rise this is arguably too low, but again it paints RYAM in the best possible light.

Excess Cash

The income from the lumber business, now sold, which is included in discontinued operations in 2021 and reflects the all-time high lumber prices, is a one-off benefit for RYAM. Normal operating cash levels are around $94 million so the windfall cash is not required for operations and hence $122 million has been added back when arriving at RYAM’s corporate value

Market Value of Debt

The market value of debt is taken from the 2020 balance sheet.

Debt Repaid in 2021

Debt has been consistently high, and I have made generous assumptions as to the amount of cash they will use from the sale of the lumber and newsprint business and a rebate of duties paid, to pay down part of their debt.  I have taken this number to be $300 million. 

Other Long-Term Liabilities

RYAM’s long-term environmental and pension liabilities, remain in place and I have taken the 2020 balance sheet number of $475 million.

Value Growth Duration

This is not a specific input, rather it is length of the specific forecast period and represents the period where investments can be expected to yield internal rates of return in excess of the weighted average cost of capital when the enterprise continues to add value. In this instance I have used a five-year forecast period, and this is intended to give RYAM an additional benefit of the doubt. In fact, based on their historic numbers and a more probable prognosis than the one presented here, there is no realistic prospect of any real value growth, and the most appropriate course would be to undertake a liquidation value.

However, even with the very optimistic gloss presented in this model, the value of RYAM’s equity is negative $300 million and if I were an investor in, or employee of, RYAM I would be a worried man, and if I were a member of the RYAM management team, I would be hanging my head in shame at the decade of value destruction that these numbers reveal.