CIBCExpecting an “strong” first quarter but trimming his financial projections for 2023, CIBC’s Hamir Patel reduced his targets for paper, forest and building product companies on Thursday. “Canadian wood products stocks have come under significant pressure over the past two months (off 20-30 per cent from year-to-date peaks vs. 0.5 per cent for the TSX Composite), given the steep rise in U.S. mortgage rates to 5.25 per cent (up 220 basis points since late December), signs of underwhelming R&R demand this spring and rapidly correcting commodity prices (SPF lumber down 30 per cent vs. YTD peak, while SYP lumber and OSB prices are off over 40-50 per cent),” he said.
“While we believe the risk of a further material rise in mortgage rates remains a major risk factor for the housing/building products complex in coming months, mortgage spreads over treasuries are likely to narrow (currently 65 bps wider than historical averages), commodity prices could find a near-term floor over the next few weeks (at still elevated levels) and valuations of wood equities are looking increasingly compelling at these levels. In wood products, we recommend Canfor, Interfor, Resolute and West Fraser. In the building products space, our Outperformer names include Doman, HDI and Stella-Jones. While we have reduced our price targets on most housing-levered names by 10-15 per cent on lower multiples given increased risks of a slowdown in housing, we still see upside of 25-35 per cent across the building products/wood names. In the pulp and packaging sectors, we continue to recommend Mercer (beneficiary of sanctions on Russia) and CCL.
Mr. Patel’s changes include:
- Canfor Corp. ( “outperformer”) to $36 from $44. Average: $43.17.
- Cascades Inc. ( “neutral”) to $14 from $15. Average: $16.36.
- CCL Industries Inc. ( “outperformer”) to $71 from $78. Average: $78.50.
- Conifex Timber Inc. ( “neutral”) to $2.25 from $2.50. Average: $2.75.
- Doman Building Materials Group Ltd. (, “outperformer”) to $9 from $10. Average: $10.07.
- Hardwoods Distribution Inc. ( “outperformer”) to $50 from $61. Average: $69.08.
- Interfor Corp. ( “outperformer”) to $42 from $48. Average: $49.67.
- Stella-Jones Inc. ( “outperformer”) to $47 from $50. Average: $52.31.
- West Fraser Timber Co. Ltd. ( “outperformer”) to $126 from $150. Average: $156.95.
- Western Forest Products Inc. ( “neutral”) to $2.25 from $2.50. Average: $2.70.
- Winpak Ltd. (WPK-T, “neutral”) to $44 from $45. Average: $47.50.