CIBC CommentaryINTERFOR CORPORATION
Likely A Better Entry Point Next Year Once Home Price Reset Further Advanced
Our Conclusion - We reiterate our Neutral rating on Interfor and $32 price target. While valuation looks attractive on both a mid-cycle and capacity-replacement basis, we see limited catalysts for wood product manufacturers over the next six months given global demand headwinds for lumber caused by higher mortgage rates (now ~7.3% in the U.S.). At the same time, double-digit declines in home prices and inflationary pressures are likely to weigh on North American consumers’ willingness to embark on major home renovation projects next year after excess home investments during the pandemic.
With its expanding mix of SPF production in Eastern/Atlantic Canada (and optionality to expand further through its GreenFirst stake), IFP is well positioned to benefit from greater demand for SPF product as supply likely declines further in BC next year (only ~15% of IFP’s capacity mix).
Key Points - Lowering Q4 EBITDA Estimate By 18%: While we have decreased our fourth quarter EBITDA estimate by $11MM to $50MM, our 2023 estimate is unchanged at $443MM (vs. ~$1.15B expected this year). We expect profitability to plunge next year with much weaker housing demand and increased industry output as the North American lumber industry is currently sized for 1.5MM housing starts. We continue to believe consensus estimates for next year are overly optimistic (we are 12% lower), with consensus forecasting SPF lumber at ~$520/mfbm in 2023 (CIBCe $500/mfbm).
Over the past few weeks, several major U.S. homebuilders have reported orders declining ~50% Y/Y in Q3 and cancellations surging as consumer confidence fades further. With builder confidence declining for the past 10 months in a row (to its lowest levels since August 2012 [excluding pandemic lows]), we expect new residential construction to slow materially. Our North American lumber supply/demand model sees NA consumption falling 7.8% in 2023 (-4.7 Bbf) as starts decline ~20% to 1.25MM and R&R consumption of wood products falls 8.0% (contrary to the perplexing LIRA forecast calling for growth of 6.5% into Q3/23). By 2024, assuming mortgage rates moderate somewhat, we see lumber demand rebounding 8.6% (+4.8 Bbf) on an expected improvement in housing starts to 1.4MM (+12% Y/Y) and a recovery in R&R wood consumption (+7.7% Y/Y).
Attractive Capacity Valuation: We estimate Interfor is trading at only ~US$275/mfbm for its 5.1 Bbf/yr platform (pro forma Chaleur). By contrast, greenfield capacity is being built at over US$800/mfbm, with the latest industry announcement from West Fraser expected to cost ~US$925/mfbm. This analysis ignores any value for IFP’s lumber duties on deposit (~US$420MMas of Q3 [with another ~US$90MM being added when the Chaleur deal closes later in Q4]).