West Fraser Timber Co Ltd T.WFG

TD

[retiredcf]

These markets are making analysts exceptionally cautious. And these are US$ targets so they are still looking for 38% SP appreciation. GLTA

West Fraser Timber Co. Ltd.

(WFG-N, WFG-T) US$76.39 | C$98.87

Adjusting Our Estimates and Moving to BUY from Action List Buy Event

We are fine-tuning our forecasts for commodity prices, volumes, and operating costs. The net effects are modest downward revisions to our 2022 and 2023 earnings forecasts. We are also tempering valuation parameters by lowering our adjusted trend EV/EBITDA target multiple to 4.7x from 5.5x previously. This reflects a higher degree of risk in forecasting North American wood product demand. Lower mid-term free-cash-flow estimates and a tempered target multiple result in our revised 12-month target price of $105.00 versus $120.00 previously. Although we remain positive on West Fraser's prospects, we are downgrading our recommendation to BUY from Action List Buy.

Impact: SLIGHTLY NEGATIVE

• Since we added West Fraser to the Action List in mid-April, the company's share price has declined 2% versus an average decline of 11% for key peers over the same duration. In our view, this outperformance was warranted based on value-accretive capital-deployment initiatives, but given the company's relative valuation gains, we are comfortable removing West Fraser from the Action List.

• Even after a busy period of capital deployment, West Fraser retains a flexible balance sheet. The company ended Q1/22 with net cash of $1.32 billion and available liquidity of $2.85 billion. In Q2/22, West Fraser completed a $1.13 billion substantial issuer bid and increased its regular dividend by 20% (to an annual yield of 1.6%). The pro forma balance sheet remains flexible (still net cash), supporting further asset-base growth ambitions.

• The hard landing for lumber and OSB prices was anticipated. Since the mid- March peak, the benchmark Western SPF 2x4 price has declined 58% to $585/ Mfbm and the benchmark North Central OSB price has dropped 68% to $410/ Msf. We are lowering our average Western SPF price forecast by 3% in each of 2022 and 2023. Our average North Central OSB price estimate falls 8% in 2022 and 4% in 2023.

  TD Investment Conclusion

  We remain positive on West Fraser's mid-term share-price prospects, but we are taking a more conservative stance at the margin, given relative outperformance in recent months. We expect that the company will remain aggressive on asset- base investments and opportunistic M&A initiatives, while returning surplus capital to shareholders.