Norbord Inc. T.OSB

TD

[retiredcf]

Raised US target works out to about C$54.60. GLTA

Norbord Inc.

(OSB-N, OSB-T) US$40.98 | C$50.45

Downgrading to HOLD as OSB Markets Near Peak Event

We are downgrading our recommendation on Norbord to HOLD from Buy in light of accelerating share-price gains in recent weeks and our view that the company's valuation now fairly reflects the underlying earnings potential. In tandem with this rating change, we are also updating our estimates to reflect upward revisions to our mid-term OSB price outlook as the North American market momentum has outpaced expectations over the past couple of months. On the basis of higher mid-term earnings estimates, mostly tied to our OSB price forecast adjustments, we are raising our 12-month target price to $43.00 from $42.00. The higher target price is not enough to warrant a positive bias.

Impact: MIXED

• We believe that mid-term consensus estimates are too low, but this is arguably reflected in the current valuation. Since bottoming out in Q3/16, Norbord's share price has climbed 116% — significantly outperforming relevant comps. In light of the recent share-price appreciation, Norbord is now trading in line with its peer-group average.

• We are raising our OSB price forecast, but we believe that the markets are approaching a cyclical peak. We have raised our average 2017 North Central OSB price forecast by 6% to $362/Msf and our 2018 forecast by 3% to $300/Msf. Prices have reached 12-year highs, spurred by steady demand growth and an absence of material supply additions over the past two years. These changes lead to higher mid-term estimates and our target price bump.

• Given significant capacity expansion on deck over the next year (12% of the current North American production base), we expect that OSB operating rates and prices are close to a ceiling.

  TD Investment Conclusion

  We have taken a more cautious bias on Norbord given our view that the North American OSB markets have limited upside. We are comfortable with our HOLD recommendation in light of expanded valuation parameters in recent months. Over the long-run, we note that Norbord has specific characteristics that differentiate the company from many peers: a rising percentage of North American sales derived from relatively steady specialty markets; stable margins in Europe; disciplined approach to supply management; and no exposure to softwood lumber trade restrictions.