Key points:
Maintaining our $97 price target and Outperform rating – Our price target is based on a blended ~6.1x multiple on our Trend EBITDA of $1,300MM (85% weighting) and our 2024E EBITDA of $823MM (15%).
For now, OSB and lumber markets have decoupled. OSB is relatively more exposed to new residential construction (59% of demand), and lumber is relatively more exposed to repair & remodel (R&R) activity (40% of demand). Residential construction activity has been supportive to start the year, while R&R activity is relatively soft, in part due to the effects of high interest rates on existing home sales (we think homes being bought and sold are associated with a disproportionate amount of R&R spending). Incremental OSB capacity from Tolko and RoyOMartin has yet to start up (let alone ramp up), which is driving additional tension in the OSB market (please see page 2 for discussion of West Fraser's sensitivity to higher OSB prices). Lumber is relatively more well-supplied, with curtailments and closures taking some time to be felt in the market given a longer supply chain, although a significant spread between SPF and SYP prices has opened up given more curtailments in SPF and capacity additions in SYP. We still see an opportunity for lumber prices to broadly move higher as the year progresses, particularly if rates move lower and help drive stronger R&R spending in particular.
Watching the weather. Warm weather in Western Canada through the winter has resulted in logging difficulties that could potentially drive log shortages in Q2/Q3, which would translate into lower SPF production levels. The warm and dry winter is also creating concerns about the upcoming forest fire season. As such, we see potential risk events for SPF availability and pricing, although SYP substitution is likely already playing out around the margins given the current spread in pricing (~$102/mfbm in the West for 2x4s, #2&Btr).
High-grading the portfolio allows for a consistent capital allocation approach through the cycle. Reducing its pulp exposure, closing higher- cost mills, making organic investments, acquiring high-quality assets, and maintaining a strong balance sheet has helped West Fraser have greater confidence in its ability to fund capital projects, pay its dividend, and act opportunistically through market troughs (buybacks, M&A). While the benefits of greater flexibility during downcycles are difficult to quantify, we think the implications for West Fraser's valuation are clearly positive.