1. Description Fortress Paper (FTP - TSX) is a Vancouver company that specializes in the production of security papers (banknotes, passports, visas) and non-woven wallpaper  (the wallpaper that peels off easily). Although the company is Canadian, all of its operations are located in Europe. The production of security papers is done at the Landqart mill in Switzerland and the wallpaper production takes place at the Dresden mill in Germany. The company was created from scratch in 2006 by canadian businessman Chad Wasilenkoff when it took advantage of the rationalization of a company called Mercer International to purchase the paper mills of Landqart and Dresden.

2. Past Performance

The company became public in June 2007 through an IPO on the Toronto Stock Exchange of 5 million shares priced at $8.The stock is currently traded around $11 and the company never paid any dividends or made shares buybacks.

3. Some figures

The company revenues for 2009 are estimated at 200 million Cdn and net income is estimated at $1.10 per share. Hence,  the stock is traded at a price / earnings ratio of 10. The balance sheet is healthy with 31 million of debt and 28 million in cash. Book value per share  was $8 at September 30, 2009.

4. What distinguishes Fortress

The crown jewel of the company is without any doubt its banknote printing activities. Despite its appearance, the paper money is a product with high technological content (some banknote have more than 30 security features) that can be sold with high margins. Barriers to entry are significant, because it is a sensitive area where customers (sovereign states) are very reluctant to try new suppliers. The Swiss paper mill of Landqart has been well established as a producer of banknotes for decades.

5. Growth Prospects

Fortress Paper will expand its Landqart mill in 2010 (the completion is scheduled for January 2011). Specifically, the company plans to invest 50 million in order to quadruple the production capacity. This major investment could double the net income of Fortress according to some analysts. The company justifies this expansion by strong demand for its security papers. The firm was even forced to politely refuse customers in the last year. Fortress is already pre-selling its future production. In addition, the company does not exclude the possibility of making acquisitions if attractive opportunities arise in the field of security papers.

6. Risks

The paper machine rebuild in order to quadruple production could experience technical difficulties and delays. However, the company has successfully managed similar operations in the past. The non-woven wallpaper business could face increased competition in the coming years as competitors convert their production to this new type of wallpaper.

7. Conclusion

Currently trading at a PE of 10, the company seems significantly undervalued given its growth potential and the fact that it went through the recession without much damage. The market seems to give Fortress a multiple similar to traditional paper producers (a declining industry). Yet, Fortress security papers are niche products with high margin and value-added technologies that deserves a multiple closer to technology companies. The stock could be worth much more in two or three years from now if the company is successfull with  its expansion plan. The current share price of $11 seems to be a good entry point.

For more information:

A Powerpoint presentation of the company

Portfolio manager Irwin Michael’s opinion on Fortress Paper

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