Interfor Corp T.IFP

RBC

[retiredcf]

October 3, 2022

Interfor Corporation
IFP acquiring Chaleur Forest Products

TSX: IFP | CAD 24.18 | Outperform | Price Target CAD 40.00

Sentiment: Neutral

Interfor to acquire Chaleur Forest Products. Interfor announced it had reached an agreement with an affiliate of the Kilmer Group to acquire 100% of the equity interests in the entities comprising Chaleur Forest Products ("Chaleur").

Valuation in focus. The transaction price is C$325MM on a cash and debt-free basis, which includes ~C$31MM of net working capital. This price maps to a 6.5x multiple on Interfor's estimate that Chaleur can generate mid-cycle EBITDA of C$50MM (pre- synergies), and roughly US$675/mfbm on the company's 350 mmfbm of sawmill capacity. This is a premium to the ~US$398/mfbm that Interfor paid for EACOM (please click here). Interfor expects the transaction to result in immediate accretion to its earnings.

Chaleur owns two sawmills in New Brunswick. The company's sawmills in Belledune and Bathurst, New Brunswick have a total of 350 mmfbm of lumber production capacity and are described by management as being "modern and well-capitalized", as well as "well-managed and efficient". The company also operates a woodlands management division based in Miramichi that manages approximately 30% of the total Crown forest in New Brunswick, and provides a secure source of fibre supply for the sawmill operations as well as a long-term stream of cash flow from third-party log sales, license management fees and silviculture activities. The company's operations were not damaged or impacted by Hurricane Fiona.

Transaction details. Interfor expects to close the transaction, which is subject to Canadian and US regulatory reviews and customary conditions, in Q422. It expects to achieve annual synergies of $5MM within twelve months of closing from "combined sales and marketing opportunities, shared purchasing programs and general and administrative expense reductions", with no capital requirements. Interfor will also assume Chaleur's countervailing and anti-dumping duty deposits at closing for consideration equal to 55% of the company's total deposits on an after-tax basis; the company had paid cumulative duties of US$82MM as of August 31, 2022. Pro-forma the transaction, Interfor will have annual lumber production capacity of 5.1 bbf, of which 44% will be in the US South, 19% in Eastern Canada, 15% in the US Northwest, 15% in British Columbia and 7% in Atlantic Canada.

Funding: cash on hand and existing credit facilities. The company intends to finance the acquisition out of cash and its existing credit facilities. The company noted that pro-forma its recent substantial issuer bid and the Chaleur transaction, its net debt to invested capital ratio would have remained below 20% as of August 31, 2022.

[Maxmoe]

Kick in the pine knots if you ask me. Yes it will be "accretive to earnings" because they have so much cash, but NOT per share,  compared to buying back stock. Imagine if instead of buying sawmill assets at the peak of the cycle, at peak of the cycle valuation, imagine if they bought back 300-400 $million in more stock?!?!  BOOOO! I know I just bought in after not owning any

[Valuecan]

Totally agree.  Can buy back own stock for 2x mid cycle EBITDA versus 6x they are paying.  Low synergies means this deal is get big for the sake of getting big.

[Tothemoon2]

Agree with you guys.  Since they just did a SIB, I'm going to give them the benefit of the doubt.  The NCIB will be renewed in November and share count will shrink again.  If lumber prices ever see a $1000 price again for any period of time, watch out,

[Maxmoe]

if it drops under 300 again , also. watch out below!!