Key points:
Q317 results above expectations – Normalized EBITDA was $200MM vs. consensus at $190MM and our estimate of $205MM.
Three in a row – Following an increase in the company's quarterly dividend last two quarters (from C$0.10 to C$0.30 in Q1 to C$0.50 in Q2), Norbord announced that the quarterly dividend will now be increased to C$0.60 for December.
OSB prices should start to come down from elevated levels – After hitting multi-year highs, OSB prices look set to be settling into typical late fall/ winter seasonality. Benchmark North Central remains at $455/msf but we saw $10 to $20 drops this week in all other regions and this may shake investor sentiment in the short term. Early 2018 could see some strength but predicated on weather (mild weather=earlier construction season=early inventory build) and also the delayed ramp-up from the 800MM sq.ft Martco mill in Corrigan, TX (information is hard to come by on this privately owned mill).
Estimates already reflect much lower OSB prices – A price retreat is expected and we remind investors that our 2018E and 2019E estimates reflect significantly lower OSB prices ($325 for benchmark NC in 2018 and $300 in 2019) despite still strong expectations on industry operating rates.
Investors remain focused on supply additions – Given the industry's unfortunate history of over-supplying the market (2002, 2007 and most recently 2013), it's no wonder that investors are concerned about new mills/restarts. However, we believe expectations on US housing starts are more reasoned now and repair and renovation spending should be strong in 2018. Our OSB supply-demand model has the industry operating rate at ~95% in 2017 (which speaks to the current high price environment) and ~95% in 2018, so pricing should remain robust but below current elevated levels. Despite production ramping up from five mill starts/restarts over 2018/19, operating rates should improve further in 2019 if housing starts and repair and renovation demand continues to increase as expected.
Tweaking estimates – 2017E EBITDA $670MM (was $681MM), 2018E EBITDA $663MM (was $667MM) and 2019E EBITDA $690MM (was $691MM)