Ticker Symbol: KSDate: 4/28/2011

ByRaj Dhawle Patil

Rajani Meka

Image: KapStone Investor Presentation, Feb. 2011

Kapstone manufactures paper packaging and forestry products

Headquartered in Northbrook, Illinois

Sells in domestic as well as International markets Principal markets: Americas, Europe &

Asia

Net Sales: $782.2 m; up 24.9% Operating Profit: $68.7 m; down 54% Net Income: $65 m; down 19% EPS: $1.38 per share Stock does not pay dividends Net Debt: $48 m Market Cap: $780.42m

Source: 10-k, fiscal year ending Dec.31st, 2010

Management Team: Roger Stone & Matt Kaplan

Source: http://ir.kapstonepaper.com/phoenix.zhtml?c=190219&p=irol-irhome

Source: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9ODE0NTh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1

Unbleached Kraft Market Unbleached Kraft Paper Linerboard Saturating Kraft Unbleached folding carton board

Forest Products Dimensional Lumber Timber

Images: KapStone Investor Presentation, Feb. 2011

Market share of 19%;300,000 tons Sold as three main types of products:

Multiwall Paper: Bags for agricultural products, pet food, baking products, cement & chemicals

Specialty converting Paper: Wide application in coating and

laminating applications, wraps, end caps and dunnage bags

Grocery bag & Sack Paper: Bags and sacks for retail, lawn and leaf, fast food carryout and grocery

Images: Kapstone investor Presentation, Feb 2011

Surface facing on corrugated boxes; 565000 tons

Sold under brand name“Durasorb”; 325000 tons per year Market Leader Found in high pressure laminates Products include furniture, shelving, counter tops, medical

surfaces, flooring and industrial laminates for sliding and plywood overlays

Sold under the brand named“Kraftpak”: 110,000 tons

Strong position in Niche market Uses include beverage, gift boxes, take out cartons,

retail food and quick serve cartons.

Images: Investor Presentation, Feb, 2011

Process

Strengths Weaknesses

One of the leading manufacturers of Kraft

LT contracts with customers

Good product Mix Long Term Contracts with few suppliers

Well positioned in Unbleached Folding Carton Business

Fluctuations in prices of inputs

Highly Efficient Operations Dependence on current management

Mills located in excellent wood baskets

L-T contracts with suppliers for inputs

Customer diversification

Opportunities Threats

Increase in worldwide demand Volatile commodity prices

Industry towards consolidation Cyclical industry

High Demand for laminates from Asia

Compliance issues

Shifting of focus on unbleached folding carton from consumer brands

Recent Stock Performance

Source: http://finance.yahoo.com/q/ta?t=2y&s=KS&l=on&z=l&q=l&p=m20&p=m200&c=^gspc

Source: http://web.ebscohost.com/bsi/pdf?sid=2029ad4a-4dac-45bc-a2b4-08bf3497f8af%40sessionmgr110&vid=5&hid=122

-Highly Fragmented -Highly cyclical with product prices fluctuating with input prices-Undifferentiated products easing the entry of new players-Moving towards consolidation -More emphasis on eco-friendly products-Historical CAGR, 2005-2009: 2%

Source: http://web.ebscohost.com/bsi/pdf?sid=2029ad4a-4dac-45bc-a2b4-08bf3497f8af%40sessionmgr110&vid=5&hid=122

Positive effects of economic recovery Demand rebounded significantly leading to

maximum operating rates Paper prices rebounded Improved product mix due to strong demand for

saturated Kraft products, domestic linerboard and Kraft paper

Benefits from Industry consolidation Unprecedented level of supply discipline and

Inventory management Availability of high quality, attractively priced assets

Source: 10-k, Fiscal year ending Dec.31st, 2011

$611 Revenue/Ton

Source: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9ODE0NTh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1

Source: 10-k, Fiscal year ending Dec 31st,2010

Company Name P/E fwd P/E ttm EPS P/B P/SEnterprise

Value/ Revenue

Enterprise Value/

EBITDA

Kapstone 11.29 12.27 1.39 1.87 1 1.06 7.45

International Paper 9.25 20.26 2.7 1.93 0.52 0.79 6.08

Smurfit Stone 11.2 4.8 2.59 1.38 0.58 0.7 7.57

Temple-Inland Packaging 11.21 15.2 1.42 2.67 0.65 0.89 8.47

Rock-Tenn 8.87 12.34 5.86 2.64 0.92 1.26 7.48

Graphic Packaging 11.96 59.78 0.36 2.31 0.45 1.05 7.6

Multiples P/E fwd Enterprise Value/ Revenue Enterprise Value/ EBITDA

Share Price $15.57 $14.08 $17.17

- The following assumptions are based on Global Economic factors, Industry outlook, Management guidance, Company’s ability to generate sales and contain costs. However, these assumptions are extremely conservative and on the assumption that the company would not acquire in the near future.

Cost of Equity 15.29%

CAPM: 15.22%

Risk Free Rate 3.40%

Market Risk Premium 6.00%

Beta 1.97

ROE( Historical Average) 15.40%

Cost of Debt 2.00%

Discount Rate : 13.50%

  2011 2012 2013 2014 2015

Net Income 59.39 109.75 166.02 167.33 156.03

D&A 42.17 50.35 51.44 57.11 58.92

Capex (41.00) (49.20) (59.04) (70.85) (85.02)

Changes in NWC (16.16) (14.01) (3.53) (16.82) (12.89)

Free Cash Flow 44.39 96.89 154.89 136.77 117.05

Terminal Value         1148.17

Total Free Cash Flow 44.39 96.89 154.89 136.77 1265.22

Enterprise Value $974.40

L-T Debt 115

Shares Outstanding 45.85

   

Share Price $ 18.74

Discount Rate 13.50%

Terminal Growth Rate

3.00%

-Revenue assumptions on the basis that Kapstone would continue its trend of acquisitions, and that it makes a single acquisition in 2013 with much lesser sales growth of 60% compared to 08’s sales growth of over 100%-COGS have been assumed to fluctuate as its inputs are from a highly cyclical industry and also based on the new revenue assumptions- After adjusting CAPEX to account for the acquisition, DCF now gives a price close to $35

DCF Range: $14.36 - $35.59, Base Case: $18.74 Triangulated Value: $17.31 Current Stock Price: $16.91

We would like to buy 200 shares at market, but due to market uncertainty, Recommend Placing on Watch List

Reasons: Portfolio Diversification Huge upward potential Company Analysis: Product differentiation, Good credit

rating, Low debt, Known for increased shareholder value, Experienced management

Industry Analysis: Growing kraft paper market, Increased demand

  Kapstone AEO DO MCD WAG JKHY WFR MOS

Kapstone 1.000

AEO 0.317 1.000

DO 0.371 0.337 1.000

MCD 0.312 0.331 0.341 1.000

WAG 0.296 0.296 0.410 0.373 1.000

JKHY 0.413 0.380 0.478 0.492 0.446 1.000

WFR 0.352 0.403 0.473 0.312 0.268 0.478 1.000

MOS 0.231 0.285 0.427 0.194 0.221 0.314 0.420 1.000