TSX:WFG - Post Discussion
Post by
retiredcf on Oct 28, 2022 8:38am
TD 2
West Fraser Timber Co. Ltd.
(WFG-N, WFG-T) US$74.66 | C$101.21
Q3 Earnings Back to Normal; Shipment Guidance Near Expectations
Event
West Fraser reported Q3/22 results after market close on October 26. Adjusted EBITDA of $426 million exceeded our estimate of $323.4 million and the consensus forecast of $365.8 million. The reported EBITDA figure included a retroactive recovery of $81 million related to an administrative review of lumber duty deposit rates. Excluding this item, adjusted EBITDA would have been between our forecast and the consensus estimate. Adjusted Q3/22 EPS of $2.50 was similarly above our forecast of $1.46 and the consensus estimate of $1.74.
Impact: NEUTRAL
Core Q3/22 operating results normalized from exceptional H1/22 levels, led by much lower wood product price realizations, volume curtailments, and cost pressure.
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Contributions from the North American EWP and pulp & paper segments were higher than our forecast. OSB price realizations declined $228/Msf (-38%) q/q, which trailed our forecast decline of $283/Msf (timing lags). Pulp & paper segment EBITDA remains weak, but the Q3/22 contribution was the highest since Q4/18, led by lower downtime.
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Small shipment guidance revisions are not surprising. Management expects that 2022 western Canadian lumber shipments will be below the bottom end of the previous 2.8-3.0 billion board feet range. 2022 Europe OSB shipment guidance is towards the bottom end of the previous 1.0-1.2 billion square feet target.
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West Fraser is proceeding with a brownfield lumber expansion in the U.S. South. The company will build a 275 MMfbm capacity sawmill in Henderson, Texas, to replace the existing asset (net capacity increase of ~140 MMfbm). The capacity multiple for this project is $927/Mfbm - a modest premium to recent greenfield initiatives and ~40% higher than replacement cost five years ago. Management targets an after-tax IRR of 12%, based on mid-cycle commodity prices (in our view, relatively skinny). West Fraser ended Q3/22 with net cash of $9.68/share on its balance sheet and available liquidity of almost $2.4 billion.
TD Investment Conclusion
We remain positive on West Fraser's share-price prospects and expect that the company will retain its balanced capital-allocation approach, including aggressive asset-base investments, while sustaining a flexible balance sheet.
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