RBC Dominion Securities’ forest industry equity analyst Paul Quinn expects third-quarter results to “mark a sharp return to normalized pricing for wood products firms after exceptional profitability in the first half of 2022.”
“We suspect investors will focus on the macro, with the effects of a potential recession looming large across most commodities,” he said in a research report released Tuesday. “We also expect continued discussion around inflation (particularly as it relates to the ability to achieve pricing increases versus inflation in inputs, energy and transportation), interest rates, and transportation challenges given how topical these themes have been year-to-date.”
Though lumber prices slid during the quarter, Mr. Quinn emphasized they still remain above third-quarter 2021 levels as well as historical averages. He expects them to remain range bound between US$425-625 per thousand board feet for the remainder of the year.
“Tight market conditions and transportation challenges in H122 drove lumber prices close to the newly established records of 2021,” said Mr. Quinn. “However, the jump in interest rates and a slowing North American housing market has cooled demand.”
“Lumber production year-to-date (to the end of June) is down 9.6 per cent in Canada and 2.2 per cent in the U.S., equivalent to a reduction of 2.6 Bfbm of production on an annualized basis (more than 4 per cent of the total market). Sawmillers in high-cost B.C. have reduced production (most are running at an 80-per-cent operating rate, with companies such as West Fraser, Canfor and Conifex announcing specific curtailments and capacity reductions) as companies struggle to stay above breakeven with increasing log costs (stumpage in B.C. increased as of July 1) and overall cost inflation.”
Citing a “weakening macroeconomic backdrop,” Mr. Quinn reduced his earnings and price target estimates for the majority of companies in his coverage universe. His target adjustments include:
- Interfor Corp. (“outperform”) to $35 from $40. Average: $42.17.
- West Fraser Timber Co. Ltd. (“outperform”) to US$110 from US$120. Average: US$112.50.
“In Canada, our favorite names are Cascades, Canfor, Canfor Pulp, Interfor. In the United States, our favorite names are Louisiana-Pacific, West Fraser, Sylvamo and PotlatchDeltic,” said Mr. Quinn.