Interfor Corp T.IFP

TD Notes

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Trees Weekly

FP Equities Start Year on Positive Note Following Tough 2022 Lumber Prices Still Falling as Curtailments Lag Demand Erosion

 Forest product equities started 2023 with across-the-board gains. The average share-price increase for our coverage universe last week was 4.2%, which outpaced gains of 2.2% for the S&P/TSX Composite and 1.4% for the S&P 500. We attribute some of last week's positive sector sentiment to moderating mortgage rates and catch-up following strong relative gains for U.S. homebuilder equities in recent months. On average, share prices in our coverage universe declined 21.5% in 2022 versus declines of 8.7% for the S&P/TSX and 19.4% for the S&P 500 Composites.

 Softwood lumber price declines continue, albeit at a slowing rate. The Western SPF 2x4 (#2 & better) cash price declined another 3% from last week to US$335/Mfbm — down 76% from the March 2022 peak and the lowest level since May 2020. Prices are well below our estimate of cash costs for most sawmills. Downtime plans for Q1/23 are being announced, but have not kept pace with demand weakness, especially from the new home construction end-market.

• OSB prices have levelled off following sharp declines in early December. The benchmark North Central OSB price ended last week at US$220/Msf — down 83% from the end of Q1/22, but steady in the past four weeks. Reports noted anemic volumes, with order files extending only 1-2 weeks. We believe that capacity curtailments are inevitable at these price levels.

• Expected capital-allocation themes for 2023: 1) Less aggressive returns of capital to shareholders. On average, wood-focused companies in our coverage universe have repurchased 23% of their shares over the past three years, often supplemented by dividends. With an expectation of neutral sector free cash flow, we anticipate that returns to shareholders will moderate. 2) Ongoing M&A activity. The lumber sector is fragmented and, with substantial industry liquidity, we believe that consolidation is inevitable. 3) A focus on sustaining balance-sheet flexibility.