The Facts (as of August 25, 2010)

Unit price: $13.85. Book value per unit: $15.35. Market cap: $492 million (medium). Distribution: $0.20 per month or $2.40 per year. Yield: 17.3%. P/E: 9.2x. Debt/equity ratio: 0.21. Payout ratio: 67%.

The Story

Canfor Pulp LP is the largest North American and third largest global producer of market NBSK pulp and is the leading producer of fully bleached, high performance Kraft Paper. CPLP owns and operates three mills in Prince George, British Columbia which are among the lowest cost NBSK pulp producers in the industry.

In 2007, the unit price was steady near $15.00, while the distribution increased from $0.14 per month to $0.18. In the recession, the distribution was slashed to $0.01 per month and the unit price fell to $4.00. The distribution has since been raised to $0.12 and then $0.20 and the unit price has recovered. This is all based on renewed strength in pulp prices, which may or may not persist.

Pros

The huge yield could, for a little while, offset the risk. When they become taxable in 2011, they should be able to maintain a similar level of payouts. The P/E appears low, suggesting the stock is “cheap.”

Cons

The company is relying on maintained strength of pulp prices to be able to maintain their distributions. Distributions have been inconsistent in the past, rising and falling with profitability. Profits have also been inconsistent, making predictions particularly uncertain.

Impression

The units of Canfor appear to provide value currently. They produce a very high yield, the payout ratio is low and the profitability is good. However, the level of uncertainty is very high. This could make a good investment, particularly through January 2011, if they are able to maintain their distributions. It is not for the faint of heart, as there is a large element of speculation.

Canfor Pulp CFX.UN

One thought on “Canfor Pulp CFX.UN

  • September 14, 2010 at 8:55 am
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    I hold CFX in my TFSA. I bought it in January when it was only $8 =) I hope they can continue to maintain their distributions after the income trust changes come to effect next year.

    Love your blog!

    Reply

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