Post by
retiredcf on Aug 08, 2022 1:10pm
CIBC Raise Target
EQUITY RESEARCH
August 7, 2022 Earnings Update
INTERFOR CORPORATION
Attractive Growth Platform In Eastern Canada
Our Conclusion
We reiterate our Outperformer rating on Interfor and raise our price target to
$42 (from $40) on higher valuation parameters given increased M&A in the
sector, as well as likely further non-core asset sales from Interfor on the BC
Coast. Over the past two years, IFP has been the fastest-growing lumber
company in North America, making well-timed acquisitions that have
significantly increased its presence in the U.S. South (acquiring one mill from
WestRock and four from GP) and provided a new platform for growth in
Eastern Canada (via the purchase of EACOM and its seven sawmills). With
its ~16% equity ownership in GreenFirst, IFP has optionality to significantly
expand its presence in Eastern Canada and increase its mix of SPF products
(species likely to garner higher values in the future as more supply comes
out of BC).
Key Points
Revising Estimates: We have increased our Q3 and Q4 EBITDA estimates
by over 15% to slightly over $100MM in each quarter, reflecting higher near-
term realization assumptions. We now see full-year EBITDA of $1.2B, before
levels moderate to $450MM in 2023E as wood product prices come off
elevated levels. Our 2023 forecast assumes an average annual W. SPF
lumber price of US$500/mfbm (~15% lower than spot). We expect IFP to
generate over $700MM in free cash flow in 2022E and over $190MM in
2023E (11% yield). Over the past month, several major U.S. homebuilders
have reported orders declining 10%-25% in Q2 (with a sharper drop-off in
June and July), with cancellations often doubling compared to a year ago as
consumer confidence has faded further. With builder confidence declining for
the past seven months in a row (to their lowest levels since May 2020), we
expect new residential construction to slow materially, with our forecast
projecting starts of 1.45MM in both 2023E and 2024E (14% lower than the
H1 average of 1.69MM).
Meaningful Non-core Asset Sales Likely On The BC Coast: With IFP
having exited Coastal lumber production in Q2 (following the sale of the
specialty Acorn sawmill), the company is undertaking a strategic review of its
remaining logging operations in the region related to its 1.67MM/yr m3 of
harvesting rights. With book value of ~$94MM, we estimate a sale of the
coastal harvesting rights could generate proceeds in the $125MM-$200MM
range over the next 12-18 months.
Attractive Capacity Valuation: We estimate Interfor is trading at only
~US$310/mfbm for its 4.7 Bbf/yr platform (almost half of which is in the U.S.
South), a steep 60%+ discount to replacement costs (now over
US$800/mfbm for a greenfield). This analysis ignores any value for the
lumber duties on deposit (~$520MM as of Q2) or the non-core coastal
logging assets (which we estimate only contribute $20MM/yr of EBITDA and
a modest $5MM-$10MM/yr of FCF given road capex).