Interfor Corp T.IFP

RBC Raise Target

[retiredcf]

August 6, 2022

Interfor Corporation
Singing the right tune; increasing PT to $40

RBC Dominion Securities Inc.
Paul C. Quinn (Analyst)
[phone], [e-mail] Matthew McKellar, CFA (Analyst)
[phone], [e-mail]

Outperform

TSX: IFP; CAD 32.60

Price Target CAD 40.00 ↑ 37.00

Our view: Interfor Corporation (“Interfor”) reported Q222 Adjusted EBITDA of $429MM, which was relatively in-line with our $428MM street-high forecast and significantly above consensus at $387MM. While lower lumber prices mean extraordinary profitability is likely in the rear-view for now, we think Interfor continues to distinguish itself through strong operating performance and capital allocation.

Key points:

Increasing our price target to $40 (up from $37) and reiterating our Outperform rating – Our price target is based on a 4.75x EV/EBITDA multiple on our trend EBITDA estimate of $475MM (85%) and our 2023E EBITDA of $521MM (15%).

SIB strikes a balance: returning capital, preserving dry powder, and bridging to a NCIB renewal – We positively view Interfor's $100MM substantial issuer bid ("SIB"), under which it can repurchase up to $100MM of its shares via a modified Dutch auction (5.4-6.3% of total as of August 4). We think the program strikes a good balance of returning significant cash to shareholders in the near-term, while bridging to regular repurchases through a likely renewal of the exhausted normal course issuer bid ("NCIB") program in November 2022. It also maintains a good amount of dry powder for either organic capex (management noted it was reviewing strategic and discretionary projects for its newly acquired Eastern Canadian platform in particular) or M&A (e.g., levering EACOM as a platform for further growth in Quebec and Ontario, via GreenFirst or otherwise).

Inventory levels back in the sweet spot; production seems likely to continue to grow – Management noted that it now views its current lumber inventory level as being within its target range. The company had managed its lumber production in Q222 to bring down its inventory levels, while logistics improved through the quarter (management stated that service levels from carrier partners has improved in all of its operating regions). The company noted that it is continuing to adapt its production rates to match demand, but given the recent acquisition of EACOM plus incremental production from the DeQuincy mill (which has moved to a two- shift operation ahead of schedule), we expect production to march higher from the record level the company achieved in Q222. Management noted that its US South operating rate in particular should improve as Eatonton and smaller strategic capital projects are completed.

Monetizing remaining Coastal BC operations - Interfor's strategic review of its remaining Coastal BC operations, which are comprised of timber harvesting and sales related to its 1.6 million cubic meters of annual harvesting rights, is likely to be a 12-18 month process. Book value of the related assets is approximately $94MM, and talks with stakeholders (First Nations and the BC government) on its process are going "very positively".

RBC Capital Markets is acting as financial advisor to Interfor Corporation in connection to Substantial Issuer Bid as announced on July 26, 2022.