More CIBC analysisEven though Jimmy Pattison and Kevin Edgson are actively trying to suppress the stock price, it's a buy at these levels!
May 4, 2023
Earnings Update
CANFOR PULP PRODUCTS INC.
Cheapest Softwood Pulp Capacity In The World Our Conclusion We are reiterating our Outperformer rating on Canfor Pulp and $3.50/share price target. With Canfor Pulp’s share price falling to the low-single-digit range for the first time since May 2009, we believe current levels represent an attractive entry point. At the same time, the depressed share price increases the likelihood that Canfor (which owns 54.8% of CFX) may look to acquire the whole business.
Key Points
Expecting Another Tough Quarter In Q2: Following weak Q1 performance, our second quarter EBITDA estimate moves ~$6MM lower to $2MM (flat Q/Q), reflecting deteriorating pricing conditions in Asia. We are lowering our full-year 2023 EBITDA estimate by 13% to $35MM, while reducing our 2024 estimate by 3% to $61MM on reduced shipment and realization assumptions.
Global Pulp Markets Facing Challenges But Pricing Floor Likely Not Far Off: With global producer pulp inventories at 51 days (highest level since the 2018 correction) and additional capacity ramping up in LatAm, prices have fallen sharply YTD. On the BEK side, UPM’s Paso de los Toros mill in Uruguay (2.1MM mtpy) recently commenced production (first deliveries expected in Q3), while Arauco’s MAPA mill (1.56MM mtpy) is also ramping up in Chile (first shipments slated to arrive in China in coming weeks). Since late February, PPI Asia indicates BEK prices have declined over ~US$250/tonne in China, bringing prices to US$460/tonne-US$500/tonne. Pulp consultant Brian McClay expects production cuts to be delayed due to lags in decision making, putting further downward pressure on prices. While Canadian NBSK prices in China have fallen ~US$200/tonne over the last two months to ~US$700/tonne, we are seeing signs that further downside risk to pricing may be limited to ~US$50/tonne given supply curtailments.
Although we expect sluggish global paper demand and BEK capacity additions to continue to weigh on softwood markets, our price deck assumes NBSK prices average US$775/tonne in Q2 and US$720-US$725/tonne in H2 (for a full-year average of ~US$775/tonne), with prices expected to average US$750/tonne in 2024 (-3% Y/Y).
Compelling Valuation: On an EV/EBITDA basis, Canfor Pulp trades at only 2.3x mid-cycle EBITDA (3.4x 2024E), a discount to Mercer at 3.7x mid-cycle EBITDA (4.4x 2024E). On a capacity basis, we estimate CFX is trading at only US$165/tonne (excluding Taylor BCTMP capacity), a 75%+ discount to the two most recent industry comps for Canadian softwood pulp capacity. Earlier this year, Domtar announced the sale of its Dryden, ON NBSK mill to First Quality for ~US$735/tonne, right in line with the capacity valuation attributed to Domtar’s sale last year of its Kamloops, BC NBSK mill to Kruger. Applying a similar metric to CFX would imply equity value of over $13/share.