Maintain their USD target. GLTA

West Fraser Timber Co. Ltd.

(WFG-N, WFG-T) US$93.67 | C$120.05

Robust Q2 Results; Shipment Guidance Lowered for Some Segments

Event

West Fraser reported Q2/22 results after market close on July 27. Adjusted EBITDA of $1.124 billion exceeded our estimate of $976.7 million and the consensus forecast of $1.049 billion. Adjusted Q2/22 EPS of $7.59 was similarly above our forecast of $6.33 and the consensus estimate of $6.88.

Impact: NEUTRAL

Our positive impressions of another excellent quarterly result are tempered by more conservative H2/22 shipment guidance for several operating segments.

  • West Fraser's Q2/22 earnings declined from exceptional cyclical peaks a year ago and in the preceding quarter, but adjusted EBITDA was still 2.9x our estimate of trend quarterly potential. Resilient North American wood product price realizations and a larger-than-expected sawmill inventory decline more than offset ongoing pulp & paper losses and pressure on European panel earnings.

  • Management lowered 2022 shipment guidance. The company expects that 2022 western Canadian lumber shipments will be towards the bottom end of the previous 2.8-3.0 billion board feet range. North American OSB shipment guidance for 2022 is now 5.9-6.2 billion square feet (down 3% from previous guidance). 2022 Europe OSB shipment guidance is now 1.0-1.2 billion square feet (down 9% from the previous range). West Fraser attributes these reductions to a combination of freight-availability constraints and lower wood product demand expectations.

  • Despite aggressive capital deployment, West Fraser retains a flexible balance sheet. The company ended Q2/22 with net cash of $782 million and available liquidity of $2.334 billion. This is after Q2/22 share buybacks of $1.475 billion.

  • We reiterate our 12-month target price of $120/share and our BUY rating. To no surprise, management did not address press speculation that Kronospan and CVC Capital are prepared to bid for the company.

    TD Investment Conclusion

    We remain positive on West Fraser's share-price prospects and await developments towards a potential offer. In the meantime, we expect that West Fraser will retain its balanced capital-allocation approach, including aggressive asset-base investments, while sustaining a flexible balance sheet.