Active Energy Group: Powering Ahead

On July 18, 2014 Active Energy Group Plc (AEG) announced that it had entered into
a landmark joint venture agreement to commercialize over 250,000 hectares (ha)
of land in Canada, which contain at least 108,000 ha of mature timber as well as
other natural resources. Since that date, the companys stock has gone up by 75%
to USD 0.076 per share, implying a market capitalization of just USD 42 million.

March 24, 2015

Analyst:
Eugene Petrusha
Market data
Bloomberg ticker
Share price, $ per share
(March 20, 2015)
Target price, $ per
share
Market cap, $ mn

AEG LN
0.076
(5.05 GBp)
0.260
(17.35 GBp)
42.0

Net debt, $ mn

1.9

EV, $ mn

43.9

Source: Bloomberg, ESCP estimates

AEG stock price, $

0.15
0.10
0.05
0.00
Mar-14

Jun-14

Sep -14

Dec-14

Mar-

However, in our view AEGs stock price is largely undervalued, considering that the
company can net as much as USD 130 million in value over the next few years
from its JV project by realizing long-term Tree Farming Permits to timber
investment management companies (TIMOs). At the KAQUO Mtis Settlements
Economic Development Summit, held on 27 January 2015, KAQUO commented that
it had received three non-binding, conditional offers, in aggregate amounting to
USD 300 million subject to further due diligence, which demonstrates a high level
of interest by investors in the asset. Moreover, with the Canadian project, the
company has signicantly changed its business and risk prole expanding from
its original business of wood chip manufacturing exclusively in Ukraine to
timberland and natural resources development and management in Canada.
Thus, given the joint venture value and the considerable international growth
opportunities in the companys other market sectors (wood chip for MDF/OSB
panel board manufacturing, wood chip for power generation, and biomass fuel
technologies), we issue a BUY recommendation for the stock with a target price of
USD 0.260 per share, implying 244% upside.
Investment summary:

Source: Bloomberg

Shareholder structure
Gravendock

27.3%

Eastwood SA

10.9%

Windstar Investments SA

10.2%

Held in treasury

10.0%

Free oat

39.6%

AEGs Canadian JV may generate USD 130 million in cash ow over the
years 2015-2017. According to a forestry sampling study that the
company commissioned, out of the total land area of 250,000 hectares,
108,147 hectares were classied as being the most commercially viable,
with an estimated merchantable timber volume of 34.8 million m3 (322.16
m3 per hectare on average). We believe that over the next three years the
JV can commercialize that valuable timberland by selling long-term Tree
Farming Permits, which at a rate of USD 3,300 per hectare (the median
price for recent transactions in Canada & the US), AEGs 45% stake in
the JV can be valued at USD 160 million. However, assuming only 90%
of the JV prot is distributed as dividends, and a dividend tax rate of
10%, this yields a net cash ow to AEG of USD 130 million.

AEG is the largest exporter of wood chip from Ukraine, supplying highquality material to several MDF manufacturers in Turkey (the leading
country for MDF production in Europe). The company has conrmed offtake wood chip contracts with Turkish customers for 2015 that represent
a 100% increase on 2014 shipped volumes of 210,000 tonnes, which
themselves represented a 300% increase on 2013 volumes. As
shipments from Ukraine offer several key advantages over traditional
transatlantic supply sources, we believe that AEG has the potential to
increase its share of the Turkish imported wood chip market to at least
25%, or 700,000 tonnes per annum, by 2018.

Our valuation target is a sum of the DCF valuation for AEGs wood chip
business and the value of its Canadian JV project based on a transaction
comparison approach, which are USD 34 million and USD 114 million
(discounted value) respectively, implying a USD 0.260 target price per
share, or 244% above the current market price.

Source: Company data

Revenue by segments
Dividends from KAQUO

150

Wood chip for BFE

Wood chip for MDF

104

26
2014e

2015f

2016f

Source: ESCP estimates

Key nancials,
USD mn
Revenue*
Dividends**
(KAQUO JV)
EBITDA
Net income
Net debt

2014e

2015f

2016f

26.3

56.3

69.0

47.9

81.5

0.5

58.5

91.9

(0.9)

55.7

89.5

2.0

2.0

2.0

Source: ESCP estimates

* not including the income from JV in Canada
** after tax

Contents
Table of Contents:

Company description..

Overview of business segments

Wood chip for MDF manufacturing

Wood chip for power generation (BFE)..

Canadian JV..

Market overview
Wood chip for MDF manufacturing... 12
Canadian lumber market 16
Wood chip for power generation (BFE)

21

Management team.. 23
DCF valuation..

24

P&L statement. 26
Important disclosures start on page 27

Company description
Overview
Active Energy Group Plc is an AIM-listed (AEG.LN) international supplier of
timber products and forestry management services, headquartered in the UK,
with operations in Ukraine, Canada, Spain and Montenegro. We understand that
the company has other markets under development including the UK and UAE,
as well as Turkey.
The Groups core business activities are supplying industrial wood chip and
timber products for Medium-Density Fiberboard (MDF) and Oriented Strand
Board (OSB) manufacturing; producing Biomass for Energy (BFE) fuels,
including wood chip, and providing timberland and natural resources
development and management services.
To date, the Groups primary operations have focused on procuring raw timber
(primarily logs, technical lumber and forestry residues) from a number of stateowned Ukrainian forestry enterprises, which deliver it by rail to its facilities in
Yuzhny Port, near Odessa on the Black Sea. It processes the timber into highquality wood chip, loads the nished material into time-chartered bulk cargo
vessels, and exports it under off-take agreements to leading MDF
manufacturers in Turkey.
AEG also sources nished wood chip from Montenegro and Spain on an ad hoc
basis when raw material specications and prot margins are acceptable and
supplies it to biomass-fuelled power plants in Italy. However, volumes have
been limited over the past few quarters, as the company has signicantly
increased its MDF wood chip activities.
The company holds a 45% stake in a joint venture timber and natural resources
development project (KAQUO Forestry & Natural Resources Development
Corporation) with several indigenous Mtis settlements to commercialize
250,000 hectares of valuable land they own in Alberta, Western Canada.
Over the past year AEG has invested in research and development of important
new environmentally-friendly technologies, including biomass fuel pelleting
solutions that will materially increase the caloric value of wood chip from waste
residue, and allow the switch from burning coal to clean energy power
generation with no cost of retro-t for existing coal-red power stations.

Wood chip for MDF manufacturing

Processed wood chips

Overview
AEG operates a wood chipping facility at Yuzhny Port on the Black Sea with a
current nominal processing capacity of 960 tonnes per day (313,500 tonnes per
annum, assuming 330 working days). The company has supply contracts with
more than 30 state-owned forestry enterprises in Western and Central Ukraine
to provide hardwood and softwood timber feedstock (primarily logs, technical
lumber and forestry residues). We estimate that in 2014 AEG produced approx.
210,000 tonnes of MDF-quality wood chip (1H2014: 61,185 tonnes).
In the near future, the company plans to extend its production capacity by 120130 tonnes per hour (500,000-560,000 tonnes per annum) by installing another
xed wood chipper at Yuzhny Port. Assuming that the additional facilities will be
commissioned by 2H2015, we estimate AEGs annual capacity at 580,000
tonnes in 2015, or up more than 163% y/y, and 780,000 tonnes onward.
The wood chip is delivered by sea to Turkey, where it is used in the production
of Medium-Density Fibreboard (MDF). Turkey is the largest manufacturer of MDF
in Europe, producing 4.3 million m3 in 2013 from six major plants, most of which
are located close to the Black Sea.
Location of AEGs facilities

AEGs production of wood chip for MDF

600

700 700 700

500
210

2014 2015 2016 2017 2018 2019

Source: Company data, ESCP estimates

It is worth noting that supplying wood chip from Ukraine has a number of key
advantages over traditional transatlantic supply sources, as transportation costs
are signicantly lower and shipping times considerably shorter, which provides
manufacturers with substantial cost savings and cash ow advantages, as well
as fresher product (a key requirement). Thus, we believe that AEG can exploit
these advantages to greatly increase its share of Turkish MDF wood chip imports.
On 12 January 2015 AEG announced that it will expand its MDF wood chip product
offering to include Pine-based softwood wood chip in 2H2015, which we believe
will open further long-term supply opportunities and give further certainty to
volume enhancements.
4

Site visitJanuary 15, 2015

Overview
AEGs wood chipping facilities are located in Yuzhny Port on the Black Sea (27
km from Odessa), on the private berth of TransInvest Service (TIS), the port
owners. TIS handles most port logistical tasks on behalf of AEG, including
receiving and unloading raw material on rail wagons, port handling, and cargo
vessel loading. The company recently purchased two additional log loaders to
speed up its production processes and prepare for increased log deliveries in
future; and a further two log loaders are on order and will be delivered shortly,
demonstrating the intent to further grow volumes at Yuzhny.
Unloading of raw timber

Wood chipper at work

Scooping of wood chip

MV Sider King (in the process of loading)

The TIS terminal is Ukraines largest dry cargo port with freight turnover of 21.4
million metric tonnes (MMTs) in 2013 and approximately 26 MMTs in 2014. Its
deep berths are capable of receiving Panamax-class vessels, which could carry
as much as 40,000 metric tonnes (MTs) of wood chip (a substantial increase
over the 14,000 to 16,000 MTs capacity of the vessels that the company is
currently utilizing on a time charter basis). In fact the port is capable of receiving
Cape Size vessels of well over 100,000 MTs capacity, but these vessels are not
used for wood chip. AEG currently uses the MV Sider King (14,000 MTs) and
the MV Amar Meray T (16,000 MTs) and is negotiating time charter
arrangements for another two dry bulk vessels to support its increased shipping
volumes.
5

Wood chip for power generation (BFE)

Overview
Over the last few years biomass wood chip has increasingly been used as a
clean energy renewable fuel for generating electric power; known as Biomass
for Energy (BFE). According to Ecoprog, in late-2013 around 2,800 BFE power
plants were operating worldwide, which either solely or partially incinerate
biomass feedstock and it estimates that a further 170 new BFE power plants,
capable of producing 3.6GW of electricity, were constructed in 2014 alone.
Due to the high transportation costs and resulting low margins of exporting BFE
wood chip from Ukraine, AEG has to date sourced nished wood chip
(produced from Pine and Spruce logs) on an ad hoc basis when raw material
specications are acceptable from sawmills and timber processing rms in
Spain and Montenegro, for delivery to biomass-fuelled power plants in Italy.
EU trade ows of wood chip and pellets

It should be noted that this segment is highly dependent on the prevailing

market prices for BFE wood chip and the caloric value measured in
Gigacalories per tonne (Gcal/t) of the processed material, which is greatly
affected by the moisture content. While AEGs Spanish wood chip has an
average caloric value of 3.2 Gcal/t, the Montenegrin feedstock stands at 2.22.3 Gcal/t due to higher moisture content. Thus, it is only protable for AEG to
supply customers on an opportunistic basis when margins are high. We
understand that this is one of the primary factors behind AEG's decision to
develop its own BFE fuel solutions, as drier/higher-energy fuel attracts a higher
market price, and is more protable and easier to transport than wood chip.
Nevertheless, with demand for BFE fuel increasing incrementally each year, we
expect that AEG will re-focus on this market sector in the future, and will
increase its trading volumes.
6

Canadian JV
Metis settlements location and
Alberta topographic map

Overview
AEG holds a 45% stake in KAQUO Forestry & Natural Resources Development
Corporation (KAQUO), a Canadian-incorporated joint venture company that it
formed with Grand Chief Ronald M. Derrickson of British Columbia and three of
the Mtis Settlements of Northern Alberta in Western Canada, owners of large
areas of valuable land, which include standing prime forestry assets.
KAQUO has the exclusive right to commercialize over 250,000 hectares of
timberland on the Paddle Prairie and Peavine Settlements, of which 108,147
hectares of mature forests contain some 34.8 million m3 of merchantable timber
(approximately 70% hardwood and 30% softwood).
The Paddle Prairie Settlement spans over 169,000 hectares and contains
approximately 58,000 hectares of commercially viable timberland, while the
Peavine Settlement spans over 82,000 hectares and contains approximately
50,000 hectares of merchantable timber.
KAQUO holds a 197-year exclusive license on the total area of 250,000
hectares, and has already commenced the process of marketing Tree Farming
Permits to investors for a period of 99 years with a possible extension of another
98 years. Current monetization opportunities include saw-log export, pulp and
paper production, sawmilling, panel board manufacturing (MDF and OSB) and
biomass fuel processing.
We believe that KAQUO will realize the full value of the Tree Farming Permits
over the next few years. The company may initially operate the forestry assets to
enhance the value of an operating business and establish the licenses. Upon
establishment of operations, the sale of Tree Farming Permits would likely be at
the higher end of the value range approximately USD 3,300 per hectare.
At a recent economic development summit in Edmonton, AEG management
revealed that several investors were interested in buying Tree Farming Permits
and/or nancing their joint venture with the Mtis Settlements, and that some of
them were looking at the option to nance the establishment of an operating
business with KAQUO. The decisive factor will be the value of the Tree Farming
Permits and the desire of the partners to operate a business.
It is also worth noting that the partners in KAQUO have long experience in the
timberland business: the Mtis have a history of operating as contract loggers
for the forestry industry, while Grand Chief Derrickson, Chairman of KAQUO,
pioneered the modern large-scale aboriginal forestry business as Chief of the
Westbank First Nation in British Columbia. From its side, AEG has expertise in
value added wood processing facilities including logistics and biomass power
station supply. Furthermore, the JV will offer direct employment for the Mtis
and the opportunity to participate in work skills programmes including
arboriculture and logging qualications.
As was mentioned at the recent Mtis Economic Development Summit in
Edmonton, AEG has strengthened their management team for the KAQUO joint
venture with the appointment of three individuals specically engaged for the
development of the Canadian forestry business.

Canadian JV (continued)
Paddle Prairie
The Paddle Prairie Settlement is located in Northern Alberta, Canada within the
County of Northern Lights and adjacent to Mackenzie County. Its area is
reported at 169,069 hectares. The Settlement develops along the Mackenzie
Highway (Highway 35), approximately 52 km south of the Town of High Level.
Furthermore, the Settlement is connected to Edmonton via the Canada National
(CN) Railway Network.
Paddle Prairie Settlement map

According to a survey based on 57 randomly selected land plots, the productive

area of Paddle Prairie was estimated at 57,868 hectares with an average stem
count of 1,139/hectare. The commercial inventory is dominated by Trembling
Aspen (261.55 m3/hectare or 66% of total) and White Spruce (127.86 m3/
hectare or 32% of total). Assuming an average cut of 1,200 hectares per year,
this translates into an annual production of 217,312 m3 of pulpwood/biomass
and 238,917 m3 of saw-logs.

Canadian JV (continued)
Peavine
The Peavine Settlement is located in Northern Alberta, Canada within the
Municipal District of Big Lakes. Its area is reported at 82,364 hectares. The
Settlement develops around Highway 750 to the northeast of High Prairie, and
is connected 50 km South to High Prairie through Rd 679, which is connected
to Edmonton via Hwy 2, 43 and 44 (average distance is 365 km). Peavine is
also connected to Edmonton via the Canada National (CN) Railway Network.
Peavine Settlement map

According to a survey based on 95 randomly selected land plots, the productive

area of Peavine was estimated at 50,278 hectares with an average stem count
of 1,362/hectare. The commercial inventory is dominated by Trembling Aspen
(112.42 m3/hectare or 47% of total), White Spruce (96.02 m3/ha or 40% of
total) and Black Poplar (25.15 or 11% of total). Assuming an average cut of
1,000 hectares per year, this translates into an annual production of 137,247
m3 of pulpwood/biomass and 103,341 m3 of saw-logs.

Canadian JV (continued)
Commercialization opportunities
According to the statements of the companys management, there are several
commercialization options for the KAQUO joint venture, including operation of
the raw material business (exporting saw-logs and selling wood pulp locally),
building a biomass-fuelled power plant that will incinerate waste material from
main forestry operations (thinnings and tree-tops), and selling Tree Farming
Permits to third parties (timber industry operators and TIMOs).
However, due to the lack of actual data on the biomass-fuelled power plant, we
analyzed the commercial possibilities of entering into the wood farming
business. Due to the differences in wood type and quality, there are two
separate markets that should be considered in this case:
1.

Woodpulp for paper industry, manufacturing of particleboards, MDF/OSB. This

market buys small diameter saw-log, less than 20cm in diameter.

2.

Saw-Log export (mostly used in home construction/building industry). This market

requires saw-log which is greater than 20cm in diameter.

According to the forest survey, with 2% of the total forest area (approx. 108,000
hectares of commercially viable timberland) being cut annually, production of
pulpwood at Paddle Prairie and Peavine could reach 388,000 m3, although this
gure could be higher as there has been no harvesting for many years.
The most viable commercialization strategy would be to supply the volume of
larger saw-log (greater than 20cm in diameter) to Asian and Far East export
markets (China, Japan, Korea) with the smaller saw-log (less than 20cm in
diameter) supplied to local pulp factories, as both settlements are located within
a 150km range of the nearest pulp mills (for example Daishova-Marubeni Intl).
Estimated costs and prices of wood pulp
40
30

average price

20
10
0
Paddle Prairie
Logging

Peavine
Transportation

Source: ESCP estimates, Logistics study, USDA, BC Government

Considering transportation costs (USD 6-7 per m3) and logging costs of around
USD 12-13, as well as current low market prices of Northern pulpwood at USD
25/m3, this yields an operating margin of USD 4-5/m3. As a result, we
understand that this is not considered to be a core business, but will provide a
contribution margin to the overall timberland operations.

10

Canadian JV (continued)
Annual production of saw-logs from both Settlements is estimated at 368,000
m3. The logs can be transported to a collection yard close to the intermodal
terminal in Edmonton, loaded in containers and shipped via railcar to the point
of export (Vancouver port facility).
In this case, however, transportation expenses will be much higher reecting
additional costs for railway transportation, transloading, and container shipment.
We estimate total CIF China costs to be around USD 100/m3 for Peavine and
USD 118/m3 for Paddle Prairie (the higher cost for the latter is explained by a
larger distance to container terminal), while import prices of lumber in China vary
in the range of USD 130/m3 (hardwood) to USD 160/m3 (softwood). Overall, we
expect that the total operating margin for lumber shipments will be 23-25%.
Estimated costs and prices of saw-log

160
140
120
100
80
60
40
20
0
Paddle Prairie
Logging

Transportation

Transloading

Peavine
Container handling

Shipping

Stumpage fees

Source: ESCP estimates, Logistics study, USDA, BC Government

Additionally, we expect that around USD 1,500/hectare (or USD 3-4/m3) should
be spent on planting, although these expenses can be delayed by 2-3 years.
However, this is outweighed by the change in fair value of biological assets,
which should be in the range of USD 8-10 million (assuming a 2% rate
of growth).
The total sales volume is expected to be around USD 62 million (of which
roughly 16% will be generated by pulpwood sales, and 84% by lumber
shipments), with an estimated net income of USD 17 million (accounting for the
organic growth of forest, and assuming a total income tax of 25%). Assuming an
after-tax cost of capital of 7% and a terminal growth rate of 2%, this translates
into a fair value per hectare of USD 3,200.

11

Market overviewwood chip for MDF manufacturing

Resource base
Forests cover an area of 9.6 million hectares, or 15.9% of the total area of
Ukraine, while wood stock is estimated at 2.1 billion m3, which places the
country in sixth place in Europe. The prevailing species of trees are Pine (33%),
Oak (24%), Beech (7%) and Spruce (8%). Woodstock inventory is quite high at
240 m3/ha, compared to 219 m3/ha in Poland or 183 m3/ha in Belarus.
However, 15.8% of forest lands are deemed as protected, while more than 50%
of Ukraines forests have ecological importance and thus have limited regime of
forest management.
Most of the land is managed by the State Agency of Forestry Resources
(SAFR, 73%), while another 13% is owned by local municipal authorities. State
forestry enterprises are responsible for the full range of forestry works from
planting of forests to logging.
Map of Ukraines forests

The volume of woodstock harvesting from all types of logging in 2013 amounted
to 18 million m3 (SAFR14.4 million m3). Logging volumes were far below the
allowable cut limit, while the overall annual growth of wood in the forests
managed by SAFR reached 24.6 million m3. This policy has allowed Ukraine to
expand its timberland area by 1%, and increase woodstock inventory by 12%
over the last 10 years.
AEG has concluded long-term contracts with 30 state-owned forestry
enterprises to secure supplies of raw materials to produce wood chip. Raw
timber (primarily non saw-logs, technical lumber and forestry residues) is
delivered by rail to the companys processing facilities at Yuzhny Port.

12

Market overviewwood chip for MDF (continued)

Export marketsTurkey
According to USDA, imported logs, primarily from Ukraine, used to be the main
raw material for Turkish MDF producers. About 60% were Beech logs, 15%
were Birch, 15% were Oak and 10% were Ash. In recent years however,
imported wood chip has become the main raw material used. Wood chip
accounts for 60% of total raw material utilized in Turkish MDF manufacturing.
Ukraine was the third largest exporter of sawn wood and wood chip to Turkey in
2013, with a market share of around 12%, after the US (34%) and Bulgaria
(13%). However, while the share of Ukrainian sawn wood in Turkeys imports
have been stable at 31-32%, the countrys share of wood chip imports into
Turkey has fallen in recent years, reaching just 6% in 2013, compared to 43% in
2008.
Ukraines exports of sawn wood and wood chips to Turkey, tonnes
800,000
Wood chips

700,000

Wood sawn/sliced/chipped

600,000
500,000
400,000
300,000
200,000
100,000
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e

Source: UN Comtrade, ITC, ESCP estimates

Last year, Ukraine exported 207,000 tonnes of sawn, chipped and sliced wood
worth USD 47 million to Turkey, while total exports amounted to USD 273
million. At the same time, the countrys exports of wood chip amounted to
195,000 tonnes or USD 19 million, 128,000 tonnes of which was supplied to
Turkey.
In 2013, the Turkish MDF market was estimated at 4.3 million m3 produced
annually, with approximately 9-10% of the end product shipped to the Middle
East and Europe. According to the UNECE/FAO forecasts, Turkey should
produce 5.0 million m3 of MDF in 2015, and export 583,000 m3 of it abroad.
Turkeys production of MDF (000 m3)
5,000
4,000

10y C

AGR:

2 4%

3,000
2,000
1,000
0
2004

2005

Source: FAOSTAT

13

2006

2007

2008

2009

2010

2011

2012

2013

Market overviewwood chip for MDF (continued)

Turkeys domestic marketoverview
Turkey is the 6th largest economy in Europe, and 16th largest in the world. The
countrys GDP per capita stood at USD 10,815 in 2013 (current US dollars),
which places Turkey in the list of middle-income countries. Turkey is also one of
the worlds biggest markets with a population of 76 million and a labour force of
28 million, with half of the population below the age of 30.
After a 5% drop in real GDP in 2009, Turkey managed to quickly recover thanks
to economic stimulus measures (reduction of taxes and lower lending rate of the
central bank) as well as an inow of foreign investments as capital shifted from
developed markets to emerging markets. Thus, in 2010-2011 the countrys
GDP grew by 9%, outperforming all other European countries. In 2012-2013,
however, the growth slowed down to 2-4% as the country was continuing to
maintain a high current account decit (mostly due to energy imports), while
savings rate dropped to below 15%. Coupled with the recovery in the US, and
the subsequent course of the Fed to taper its expansionary monetary policy
soon, it resulted in the devaluation of the Turkish lira as capital started going out
of the country, which has already forced the Central Bank of Turkey to ramp up
its base rate to 14%.
Turkeys building permits statistics (# of dwelling units)

Turkeys real GDP growth

9.2

8.4

1200

8.8

6.9

1000
4.7

4.1
2.1

800

3.0

600

0.7

400
200
-4.8
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e

0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e

Source: OECD

Source: Turkish Statistical Institute

The Turkish construction sector, however, was performing much better than the
economy as a whole, growing by 7.1% in 2013 and becoming one of the main
drivers of the local economy. The construction permit statistics point to a
sustained growth of the sector in 2014.
In 2013, the government introduced an Urban Transformation project, which
envisages the demolishing and renewal of millions of buildings (6.5 million over
the next 15-20 years) deemed to be unsafe in the countrys earthquake-prone
regions. The project is likely to induce a higher rate of growth in the construction
and related industries.
According to IBS Consulting, the Turkish breboard industry is expected to
grow by 8% annually reaching USD 2.7 billion by 2017, while the production
level is expected to reach 5.6 million m3.

14

Market overviewwood chip for MDF (continued)

Prices
According to trade statistics, the implied price of wood chip imported from
Ukraine was in the range of USD 90-115/t in 2013-2014, with the latest
recorded price of USD 107/t. Prices mainly uctuate due to seasonality factors,
as well as changing demand for wood-based panels.
Implied import price of Ukrainian wood chip, USD/t
150
140
130
120
110
100
90
80
70
60
50
Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

Apr-14

Jul-14

Source: UN Comtrade, ITC, ESCP estimates

Domestic sales prices of breboard in Turkey have dropped by 7% to

USD 420/m3 in 2013 on the back of increased production and devaluation of
the Turkish lira. However, considering growing demand supported by the
construction industry in Turkey, we expect prices to recover slightly in 2015.
Domestic prices of breboard in Turkey, USD/m3
451

420
404
394
377

2009

2010

Source: IBS Consulting

15

2011

2012

2013

Market overviewCanadian lumber market

Resource base
Canada has over 348 million hectares of forest lands, which represents 9% of
the worlds forests, primarily containing Spruce, Poplar and Pine. According to
National Resources Canada (NRCan), in 2013, the forest industrys contribution
to Canadas GDP was USD 19.8 billion, with 216,000 people directly employed
in the industry. In 2012, 148 million m3 of industrial roundwood were harvested
in Canada from an area of 0.6 million hectares, or approximately 0.3% of the
total standing wood volume of 47 billion m3.
Canadian forests composition

Out of the total timberland area, 153 million hectares of forests have been
independently certied as sustainably managed. It is worth noting that about
90% of Canadas forests are publicly owned. Provincial governments regulate
harvest levels on provincial Crown lands by specifying the annual level of harvest
allowed on a particular area (annual allowable cut or AAC). However, according
to NRCan, Canadas estimated sustainable wood supply is currently much
higher than the annual volume of harvested timber (227 million m3 vs. 148
million m3 in 2012).

16

Market overviewCanadian lumber market (continued)

Supply-side shocks
The mountain pine beetle (MPB) epidemic in British Columbia (BC) has caused
signicant mortality in Pine forests. The current MPB outbreak started in BC in
the early 1990s and has since killed about 55% of the total volume of
commercial Lodgepole Pine in the province. It is estimated that by 2017 over
70% of current standing volumes of BC Pine will be destroyed by MPB. As the
province accounts for more than 40% of the total volume of harvested forest in
Canada, it will most likely result in the signicant drop in production volume of
saw-logs, which could push the prices upwards as a result of a supply gap.
MPB-affected areas in Canada

Source: Natural Resources Canada (NRCan)

It should also be noted that while the MPB epidemic has now spread into
Alberta, the forests in the Paddle Prairie and Peavine Settlements are mostly
composed of Spruce and only a small amount of Pine. Furthermore, the latest
maps of MPB population prepared by the Environment and Sustainable
Resource Development Ministry of Alberta show either no MBP infestation or a
decreasing population of MBP near the Settlements.
The reduction of the annual allowable cut in Quebec and Ontario provinces will
also affect the North American timber supply in future. Reductions in Quebec
began in 2008 as a result of the Coulombe Commission report on the
sustainability of public-forest management, which concluded that the forests
were overharvested and recommended a 20% cut in production. However, the
provinces authorities later introduced a 35% reduction in AAC.

17

Market overviewCanadian lumber market (continued)

Domestic production
In 2013, production levels were up across all segments of the forest sector in
Canada. Thus, production of lumber grew by 6% y/y to 59 million m3, while
structural panels production increased by 7% y/y to 7 billion m3, supported by
the recovery in the US housing market. Wood pulp production was largely
stable at 17 million tonnes (+1% y/y). At the same time, domestic consumption
of lumber was down by 4% y/y to 23 million m3, while consumption of wood
pulp amounted to 7.8 million tonnes (+3% y/y).
International trade
The main consumer of the Canadian lumber is the US with a 61% share of total
exported value of sawn wood in 2013. The US housing market remains a key
driver in North American lumber market, as the majority of lumber is used in new
home construction (about 3040% of North American lumber goes into new
homes, with another 3035% used in repair and remodeling). Canadian
softwood lumber exports soared in 2013, rising by 29.5% y/y to USD 7.4 billion,
out of which USD 4.4 billion were exported to the US.
Housing starts in the US, annualized rate (000 units)

Exports of wood from Canada, (000 m3)

40,000

1,200
1,000

sawn softwo od

industrial roundwood

30,000

800
20,000

600
400

10,000

200
0

2009

2010

2011

2012

2013

2014

Source: US Census Bureau

2009

2010

2011

2012

2013

Source: UNECE/FAO

Another big export market for Canadian lumber is China. Shipments of softwood
lumber to China have been rising steadily over the past few years, reaching 7.96
million m3 in 2013 (12 times as much as in 2007). We believe that the growth of
exports to the region will slow down in 2015 due to Chinas economy losing
steam, but Canada is likely to stay one of the key exporters.
Monthly shipments of softwood lumber to China (000 m3)
1,000

US

Canada

800
600
400
200
0
Oct-07

Oct-08

Oct-09

Source: Canada Statistics, COFI, FAS

18

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Market overviewCanadian lumber market (continued)

Prices
Domestic prices of softwood lumber have been increasing steadily over the last
few years, while prices of pulpwood remained relatively stable, albeit declining in
September-October 2014. According to the latest log market report of British
Columbia government, SPF (Spruce-Pine-Fir) lumber prices were around
USD 65/m3 in October 2014 (+14% ytd), while pulpwood prices dropped to
USD 32/m3 (-9% ytd).
Domestic prices of lumber and pulpwood in British Columbia ($/m3)
100

sawlogs

pulpwood

80
60
40
20
0
Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

Apr-14

Jul-14

Oct-14

Source: BC Government website

At the same time, average coast log prices for SPF (Vancouver log market) were
USD 116-117/m3 in October, while prices for Birch and Alder were in the range
of USD 55-65/m3.
US prices of framing lumber have failed to recover from a sharp selloff in spring
2013 after disappointing housing starts data, and stayed in the range of
USD 350-400/1,000 board feet (tbf) in 2014. However, positive economic data
on the US economy (+5% GDP growth in 3Q2014) and revival of housing starts
gives hope for a rebound of prices in 1Q2015.
US prices of framing lumber ($/1,000 board feet)
500
450
400
350
300
250
Jan-13

Apr-13

Jul-13

Source: Random Lengths, NAHB

19

Oct-13

Jan-14

Apr-14

Jul-14

Oct-14

Timberland pricestransaction analysis

We have reviewed the latest transactions involving the sale of timberland in the
US and Canada with publicly disclosed information about the deal size and
characteristics of timberland assets. Average transaction prices of timberland
vary in the range of USD 2,000-5,000 per hectare, with the median value of
USD 3,303 per hectare.
The latest transaction in Canada involved the purchase of 634,000 acres of
timberland in British Columbia by BC Investment Management Corporation and
Alberta Investment Management Corporation for a total consideration of USD
170 million, which translates into a price per hectare of USD 2,651.

M&A transactions with timber tracks in 2010-2014

Date

Location

Acres of
timberland

Deal size,
$ mn

$/acre

$/ha

Mar-14

US/Georgia

36,340

74

2,036

5,032

Sep-13

US/Alabama

72,000

90

1,250

3,089

Jul-13

US/Virginia

39,945

17

413

1,021

Jun-13

Canada/British Columbia

634,000

170

1,073

2,651

Apr-13

US/Georgia

46,000

72

1,565

3,868

Dec-12

Texas

62,600

88

1,406

3,474

Oct-12

US

29,300

21

700

1,729

Oct-12

US

2,000

1,000

2,471

May-12

US

4,700

1,766

4,364

Dec-11

US

7,400

797

1,970

Nov-11

US/Texas

7,000

12

1,763

4,356

May-11

US

2,600

2,346

5,797

7,678

22

2,867

7,084

14,280

18

Feb-11
Sep-10

Canada/British Columbia
US/Texas

1,268

3,132

Average

1,446

3,574

Median

1,337

3,303

Source: CapitalIQ, ESCP estimates

Considering the recent increase in the price of softwood lumber, as well as likely
shortages of supply from the British Columbia due to the MPB (mountain pine
beetle) infestation, we believe that the timberland assets of KAQUO may be
priced close to the median level for comparable transactions at USD 3,300 per
hectare (USD 1,330 per acre), which brings the total possible cash ow to AEG
to about USD 130 million (assuming that 90% of the revenue of the KAQUO JV
is immediately distributed as dividends, and a 10% tax rate is applied on
dividends under the Canada-UK legislation on avoidance of double taxation).
It is reasonable to assume that the company will be able to sell Tree Farming
Permits for several areas of the timberland controlled by KAQUO, rather than the
whole asset itself. Thus, selling a permit for 25,000 hectares (61,750 acres)
could net AEG a total of USD 30 million in dividends (after taxes). We believe
that KAQUO will be able to commercialize the entire asset in 2-3 years.

20

Market overviewWood chip for power generation (BFE)

According to all major sources (IEA, EIA, BP, Pyry etc.) the share of
renewables in energy consumption should increase in future, which will be
greatly inuenced by current polices of key global economiesthe EU, China,
and the US. For example, the EU aims to get 20% of its energy from renewable
sources by 2020 (The EU RES Directive).
The European biomass market is expected to grow from 82 terawatt-hours
(TWh) in 2013 to 250 TWh in 2020 (biomass electricity production), according to
the European Renewable Energy Council. Thus, the demand for wood in the EU
is very likely to increase in the period to 2020 and potentially beyond, with most
of this due to a signicantly greater increase in the demand for wood for energy.
This demand can be satised by various types of wood: wood pellets, wood
chip, sawdust, post-consumer recovered wood etc.
In 2013, the EU-28 countries imported USD 4 billion of fuel wood, the majority
of which was attributed to wood pellets (56%) and wood chip (20%, mostly
coniferous wood chip). The top-5 importing countries of coniferous wood chip
were Finland (32% of total or USD 164 million), Austria (18% or USD 90 million),
Sweden (14% or USD 73%), Germany (7% or USD 36 million) and Italy (6% or
USD 30 million), while the total import value reached USD 504 million.
Imports of wood chip by EU-28 countries, USD mn

EU imports of fuel wood, by value (2013)

7%

Wood in chips, non-coniferous

Wood pellets

Wood in chips, coniferous

11%
Sawdust and wood waste

13%

383
327

Wood in chips, coniferous

262

213

56%
Fuel wood

14%

403

457

2009

2010

549

284

456

504

2012

2013

Wood in chips, non-coniferous

Source: ITC, Comtrade

2011

Source: ITC, Comtrade

The majority of coniferous wood chip was also imported from the EU-28
countries (72%), while Russia and Belarus accounted for another 25% of total
exports to the EU (in value terms). However, the share of intra-EU shipments of
hardwood chip is only 43%, while major exporters are Uruguay (34%), Germany
(8%) and Russia (7%).
The demand for woody biomass is mostly driven by the evolution of the biomass
power plant industry. Thus, according to Ecoprog, at the beginning of 2014
there were around 1,200 active biomass power plants in Europe. This number is
expected to grow to approximately 1,750 by late 2023. In South Italy alone, the
total feedstock demand of biomass power plants is forecasted to increase from
1.1 million dry tonnes p.a to 1.7 million dry tonnes p.a. due to new projects
coming online in future, according to Pyry.

21

Market overviewWood chip for BFE (continued)

Prices
The prices of wood fuels and fossil fuels can be compared by primary energy
prices in EUR/MWh. Typically energy value of wood fuel varies mainly according
to its moisture content. Out of all wood fuels, wood chip is the cheapest.
Prices of wood fuels compared to heating oil, EUR/MWh

Source: BiomassTradeCentre

Due to fragmented markets, as well as different local demand and supply

chains, wood chip prices vary a lot across Europe. According to the
BiomassTradeCentre, the lowest prices in 1H2014 were recorded in Croatia
(EUR 56/t) and Romania (EUR 58/t), while the highest prices were observed in
Ireland (EUR 136/t), Austria (EUR 132/t) and Germany (EUR 114/t) for wood
chip with moisture in the range of 20-30% and a particle size of P45.
Price dynamics of wood chip in some European countries, EUR/MWh

Source: BiomassTradeCentre

Over the rst half of 2014, in Croatia, Romania and Germany prices of wood
chip have increased by about 7% and 8% respectively compared to 2H2013. In
Austria the prices decreased by around 11% and in Ireland remained at
approximately the same level.

22

Management team
Richard Spinks, Chief Executive Ofcer
Mr Spinks is a seasoned entrepreneur, with a proven track record in business
development within the hi-tech, food processing, agriculture and forestry/
biomass industries. He has worked in Central and Eastern Europe since 1980,
gaining vast experience and a network of high-level contacts across different
industry sectors in a number of emerging markets, including Russia, Ukraine
and Poland. Prior to his appointment as Chief Executive Ofcer at Active Energy
Group Plc in 2012, he founded and served as Chief Executive Ofcer (20042009) at Landkom International Plc, the rst AIM-listed company in the
agricultural sector, based in Ukraine.
Matteo Girlanda, Chief Operating Ofcer
Mr Girlanda has over ten years experience in pan-European wood trading,
processing and logistics for the biomass fuel and MDF manufacturing sectors,
as well as considerable knowledge of forestry management, renewability and
sustainability. He has worked in Ukraine since 2005, initially as Director of ICL
Ukraine (2005-2011), a wood chip processing and shipping company. He then
founded and headed up Nikofeso Group, which owned and operated highvolume wood chip processing, logistics and port facilities in Western and
Southern Ukraine, and which he developed to become the countrys leading
exporter of wood chip to the EU and Turkey.
Brian Evans-Jones, Chief Financial Ofcer
Mr Evans-Jones is a qualied Chartered Accountant, with many years
international experience working with start-ups and established businesses
across a broad range of industry sectors. He has acted as a consultant to,
ofcer of, and investor in a number of businesses in the food, manufacturing,
construction and property sectors across the UK, Europe and CIS, including
several turn-around situations and early stage companies. His clients have
included Harsco Inc., Ensemble Combined Services, Celtic Oriental,
Boditronics, Ty Nant Spring Water (where he was a Founder and Finance
Director) and Seconds Ahead.
Frank Lewis, Non-Executive Chairman
Mr Lewis is a highly-experienced and accomplished public company director,
having served as Non-Executive Chairman and Director for a number of
international publicly-quoted rms with interests across the UK, Europe, Far
East, Middle East and Africa. He is a Fellow of the Institute of Chartered
Accountants in England & Wales and serves as a committee member for its
special interest group for Non-Executive Directors, and was previously a
member of the AIM Advisory Council, which advises the London Stock
Exchange on matters relating to the AIM market.
Giuseppe (Joseph) Valoroso, Non-Executive Director
Mr Valoroso has been involved in the forestry and timber products industries for
almost ve decades, and has signicant experience in large-scale commercial
logging operations. He founded his rst logging rm in British Columbia in 1965;
before establishing Valoroso Logging (1972-1987), which he developed to
become the largest logging company in the territory, supplying large volumes
(up to 3,000 m3 per day) of high-quality timber to sawmills and wood
processing rms throughout the region.
23

DCF valuation
Assumptions
For the purposes of this valuation we excluded any cash ow to/from AEGs
BFE fuel pellet division, as the technology is still in its early stages and cant be
valued properly on the data we have right now.
We estimate that the company will be able to gradually ramp up its wood chip
for MDF division to 700,000 tonnes supplied in 2017-2019 due to a planned
increase in production capacity from 80 tonnes per hour to 200 tonnes.
However, we conservatively assume that AEG will limit its sales of Biomass for
Energy (BFE) to 50,000 tonnes annually as currently margins remain quite low.
We estimate that the companys MDF wood chip gross margin will improve to
about 24% in 2015 on back of the positive effect of the Ukrainian hryvnia (UAH)
devaluation on costs, but gradually decrease to 16% in 2019 as cost ination
catches up, while a strong US dollar and weak Turkish lira will not allow wood
chip prices to increase substantially.
As for the BFE segment, we estimate that margins will eventually improve to
about 10% in 2017 as the company improves the efciency of its operations.
Parameter

2014

2015

2016

2017

2018

2019

Wood chip for MDF

210,000

500,000

600,000

700,000

700,000

700,000

Wood chip for BFE

42,629

25,000

50,000

50,000

50,000

50,000

Wood chip for MDF, $/t

109

109

109

109

109

109

Wood chip for BFE, $/t

81

76

74

77

79

81

Wood chip for MDF

13%

24%

21%

18%

17%

16%

Wood chip for BFE

0%

3%

5%

10%

10%

10%

2,523

4,627

5,672

6,575

6,584

6,594

800

2,000

250

250

250

250

USD:UAH

12.50

25.00

25.50

26.01

26.53

27.06

EUR:USD

1.25

1.05

1.00

1.00

1.00

1.00

Volumes, tonnes

Prices

Gross margin

Other items
Working capital
CAPEX
Exchange rates (avg)

We expect that the companys working capital will be around 30 days of sales,
as shipping time is relatively small, while payment from clients is usually
delivered without delays.
Moreover, we forecast that the company will need about USD 2 million of
additional investment to expand the capacity of its MDF wood chip division in
Yuzhny Port and install equipment needed to produce softwood wood chip
(log debarker).
As for the value of the companys share in KAQUO, we assume that the JV will
be able to sell Tree Farming Permits for 108,000 ha over a two-year period at a
price of 3,300/ha, which brings the total possible cash ow to AEG to USD 130
million (assuming that 90% of the revenue of the KAQUO JV is immediately
distributed as dividends, and a 10% tax rate is applied on dividends).

24

DCF valuation (continued)

DCF Output
USD 000
FCF to Firm
EBIT

2014e
(1,394)

2015f
4,697

2016f
7,793

2017f
8,332

2018f
8,524

2019f
7,799

148

10,115

10,433

10,887

10,001

9,087

18%

18%

18%

18%

18%

18%

- Tax

(27)

(1,821)

(1,878)

(1,960)

(1,800)

(1,636)

+ Depreciation

308

508

533

558

583

608

(800)

(2,000)

(250)

(250)

(250)

(250)

- WC change

(1,023)

(2,104)

(1,044)

(903)

(9)

(10)

WACC

27.5%

27.5%

27.5%

27.5%

27.5%

27.5%

Discount factor

0.82

0.65

0.51

0.40

0.31

Time factor

1.00

1.00

1.00

1.00

1.00

3,873

5,041

4,228

3,394

2,436

Income tax rate

- CapEx

FCFs Discounted
WACC to perpetuity
Sum of FCFs
Terminal growth rate

20%
18,972
3.0%

Terminal value

47,253

NPV of TV

14,761

WACC calculation
Risk-free rate (UST)

2.3%

Unlevered beta

1.00

Levered beta

1.49

Equity risk premium

5.6%

33,733

Country risk premium

23.5%

Add: JV value (discounted at 8%)

114,206

Cost of equity (USD)

34.2%

Total company value

147,939

Risk-free rate (Ukr. 10 year Eurobonds yield)

18.0%

AEG premium/discount

10.0%

Tax rate

18.0%

0.260

After tax cost of debt

23.0%

Current value

0.076

%D

60%

Upside

244%

%E

40%

TV contribution to EV
Segment value

44%

Less Net Debt

-1,825

Less Conv. Debt

-1,048

Equity value
Value per share, USD

145,067

WACC (USD)

25

27.5%

P&L statement
USD 000
Sales
COGS
Gross prot
Gross margin
Admin. Expenses
EBIT
EBIT margin
Finance cost
EBT
Taxes
Net income
NI margin

2014
26,312
-23,414
2,898
11%
-2,750
148
1%
-1,050
-902
0
-902
-3%

2015
56,298
-43,159
13,139
23%
-3,025
10,115
18%
-625
9,490
-1,708
7,781
14%

26

2016
69,004
-55,395
13,609
20%
-3,176
10,433
15%
-600
9,833
-1,770
8,063
12%

2017
79,995
-65,773
14,222
18%
-3,335
10,887
14%
-700
10,187
-1,834
8,354
10%

2018
80,111
-66,608
13,502
17%
-3,502
10,001
12%
-700
9,301
-1,674
7,627
10%

2019
80,229
-67,466
12,763
16%
-3,677
9,087
11%
-700
8,387
-1,510
6,877
9%

Important information and company prole

Empire State Capital Partners

T/F:

+ 38 044 237 77 27, NY: +1 (917) 475-0447

Sales:

+ 38 044 237 77 27-609

20A Kozhumyatska Street

Email:

research@empirestatecap.com

Kyiv, Ukraine, 04071

Our website:

www.empirestatecap.com

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+ 38 044 237 77 27

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Fixed Income and Equity Sales

Private Clients Group

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+ 38 044 237 77 27

dzaitseva@empirestatecap.com Alexandr Saul

+ 38 044 237 77 27

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+ 38 044 237 77 27

pyachmenov@empirestatecap.com Eugeny Tumaykin

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etumaykin@empirestatecap.com

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mbirch@empirestatecap.com Valeria Kondratenko

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Equity Trading
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Research
MD, Head of Research
Yaroslav Udovenko

+ 38 044 237 77 27

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+ 38 044 237 77 27

epetrusha@empirestatecap.com

Equity Research
Eugene Petrusha

About us
Empire State Capital Partners is a full service investment company with Western roots headquartered in Ukraine. We
offer services in capital markets advisory, mergers and acquisitions, debt and equity underwriting, corporate nance,
brokerage, asset management and structured products. Our team is comprised of experienced professionals from
United States, Europe, Australia and Ukraine, who have been involved in a wide variety of investment projects in CIS
countries and overseas.
Disclaimer
Although the information in this report was collected in good faith and has been obtained from sources which Empire State Capital Partners believes to be reliable, we do not represent or warrant
its accuracy, except with respect to information concerning Empire State Capital Partners, its subsidiaries and afliates, either expressly or implied, and such information may be incomplete or
condensed. Nor has the information and/or data been independently veried, and so is provided without further caveat regarding its reliability, suitability for commerce or specic purpose.
This report does not constitute a prospectus and is not intended to provide the sole basis for an evaluation of the securities discussed herein. All estimates and opinions included in this report
constitute our judgment as of the date of the report and may be subject to change without notice. Empire State Capital Partners or its afliates may, from time to time, have a position or make a
market in the securities mentioned in this report, or in derivative instruments based thereon, may solicit, perform or have performed investment banking, or other services (including acting as
advisor, manager) for any company referred to in this report and may, to the extent permitted by law, have used the information herein contained, or the research or analysis upon which it is
based, before its publication. Empire State Capital Partners will not be responsible for the consequences of reliance upon any opinion or statement contained herein or for any omission. This report
is condential and is being submitted to select recipients only. It may not be reproduced (in whole or in part) without the prior written permission of Empire State Capital Partners.
Any recommendations, opinions, forecasts, estimates or views herein constitute a judgment as at the date of this report. This document has been produced independently of Empire State Capital
Partners and the recommendations, forecasts, opinions, estimates, expectations, and views contained herein are entirely those of the research analyst(s). While all reasonable care has been taken
to ensure that the facts presented herein are accurate and that the respective recommendations, forecasts, opinions, estimates, expectations, and views are fair and well considered, none of the
research analyst(s), Empire State Capital Partners or any of its directors, managers or employees has veried the contents of this document and, accordingly, no research analyst, Empire State
Capital Partners or any of its respective directors, managers or employees shall be in any way responsible for its contents.
Empire State Capital Partners received payment for the compilation and distribution of this research report.

Empire State Capital Partners, 2015

27