RBC increases CFP target to $26 (outperform)
Lumber and OSB prices have surged to record levels on the back of: 1) record repair & remodel demand; 2) rebounding new residential construction markets; and, 3) limited supplies due to curtailments in late March/April and COVID-19 related staffing problems. In addition, de-stocking in the early days of COVID-19 left dealers with extremely low inventories and unprepared for the current boom in demand. While prices are unlikely to remain at such high levels, we still believe that investors are underappreciating the cash generation potential of the businesses given that unit production costs should actually decline given the greater fixed cost contribution per unit and recent investments in efficiency.
Historically, wood product producer share prices have been highly correlated with commodity prices. That relationship has broken down during the recent rally, with share prices leveling off as we expect investors are waiting to see how the situation plays out. Based on historical relationships, West Fraser could theoretically be trading at $120, Interfor at $35, and Norbord at $65. While we do not think that shares will trade quite that high, wood product producers do deserve some credit for the upcoming cash windfall. We expect the focus will be on debt reduction and shareholder returns; however, M&A could be an option at the right price. In our view, Rayonier Advanced should be a seller in this market.
We are increasing our 2020 and 2021 wood product commodity price forecasts With lumber, OSB, and plywood prices at or near record highs across the board, we are increasing our commodity price forecasts for Western SPF lumber, Eastern SPF lumber, Southern Yellow Pine lumber, OSB, and plywood. While we recognize that current prices are partially attributable to tight inventory levels through the supply chain, we expect that record repair & remodel demand, rebounding new residential construction activity, and COVID-19 related supply challenges will be enough to keep wood product prices at still historically strong prices through the next few months. We still see some upside to our 2021 estimates if rising new residential construction demand is enough to offset the seasonal slowdown in repair & remodel activity. Below, we summarize our key commodity price changes:
1. Lumber: For 2020, we expect Western SPF 2x4s to average $470/mfbm, Eastern SPF to average $565/ mfbm, and SYP to average $465/mfbm. For 2021, we forecast Western SPF at $440/mfbm, Eastern SPF at $540/mfbm, and SYP at $455/mfbm.
2. OSB: For 2020, we expect 7/16" panels to average $350/msf in the North Central, $340/msf in the South East, and $330/msf in Western Canada. For 2021, we expect prices to average $325/msf in the North Central, $315/msf in the South East, and $305/msf in Western Canada. Updating our estimates and price targets, reflecting increased commodity price forecasts
We have updated our estimates, price targets, and/or ratings for the following companies:
• Canfor Corporation (increasing price target +$4 to $26 and reiterating Outperform rating)