td rates a buy with $1.75 targetWestern Forest Products Inc. (WEF-T) C$1.35
Resuming Coverage Post Secondary Issue; Reiterate Positive Bias
Event We are resuming coverage of Western Forest Products following the recent secondary offering by Brookfield Special Situations Management Ltd. (BSSML). BSSML sold 46 million units at a price of $1.45/unit for proceeds of $66.7 million; each unit consists of one non-voting share and one warrant (entitling the holder to purchase one voting share at $1.60/share until July 31, 2014). Following this offering and the completion of the recent $100 million Dutch Auction, BSSML’s aggregate equity stake in Western Forest Products (common plus non-voting shares) declines to 54% from 71% at the end of July. Following an associated non-voting to voting share conversion, BSSML holds 49% of Western’s common voting shares, consistent with the percentage stake following the Dutch Auction.
Impact NEUTRAL — This secondary offering has no bearing on our investment thesis. We have raised our mid-term estimates to reflect higher price expectations for the company’s specialty lumber grades; positive price momentum for most of these grades has decelerated, but overall levels have remained above trend for longer than we anticipated. We forecast sequential earnings weakness during Q3/13 as seasonal log cost inflation undermines margins, but we still expect that Western’s results will compare favourably with the peer group given the company’s heavy weighting to specialty lumber grades. We reiterate our view that the company offers a compelling combination of sustainable dividend yield and attractive value. Our BUY recommendation and 12-month target of $1.75/share are unchanged.
Details The BSSML secondary offering and participation in the Dutch Auction continue the parent’s gradual ownership stake reduction. BSSML’s aggregate equity stake in Western (common shares plus non-voting shares) declines to 54%, down from 71% at the end of July and 86% in early 2012. This has been a consistent theme across many of Brookfield’s/BSSML’s forest products investments as the parent has also sold stakes in private
Paper & Forest Products Recommendation: BUY Unchanged Risk: HIGH 12-Month Target Price: C$1.75 Unchanged 12-Month Total Return: 35.6% Market Data (C$) Current Price $1.35 52-Wk Range $1.70-$1.03 Mkt Cap (f.d.)($mm) $545.5 EV ($mm) $625.2 Dividend per Share $0.08 Dividend Yield 5.9% Avg. Daily Trading Vol. (3M-All Exch) 657416 Financial Data (C$) Fiscal Y-E December Shares O/S (f.d.)(mm) 404.1 Float Shares (mm) 192.6 Net Debt ($mm) $79.6 Net Debt/Tot Cap 19.9% BVPS (f.d.) $0.79
Estimates (C$) Year 2011A 2012A 2013E 2014E EBITDA ($mm) 61.6 50.6 136.7 152.5 EBITDA (old)($mm) -- -- 126.1 148.2 EPS (f.d.) 0.07 0.04 0.21 0.29 EPS (f.d.)(old) -- -- 0.19 0.28 EBITDA ($mm) Quarterly Estimates (C$) Year 2011A 2012A 2013E 2014E Q1 13.0 9.3 31.9 -- Q2 21.2 18.7 44.9 -- Q3 15.8 8.4 32.7 -- Q4 11.6 14.2 27.1 -- Valuations Year 2011A 2012A 2013E 2014E EV/EBITDA 10.1x 12.4x 4.6x 4.1x P/E (f.d.) 19.3x 33.8x 6.4x 4.7x Supplemental Data Year 2011A 2012A 2013E 2014E Lum P ($/Mfbm) 692 698 784 790 Lumber (MMfbm) 811 894 895 950 Logs $/m3 73 72 85 86 Logs (000 m3) 3,190 3,430 3,182 3,500 US$/C$ 1.012 1.001 0.974 0.952 Notes:Adjusted for August Dutch Auction
All figures in C$, unless otherwise specified.
Sean Steuart, CFA Kasia Trzaski, CA, CFA (Assoc.)
Action Notes October 10, 2013 Equity Research
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timberland investments, Norbord and Ainsworth (an agreement to sell the entire company) in recent months in tandem with the U.S. housing recovery.
Western has taken a balanced approach to an ongoing aggressive discretionary capex program and returning capital to shareholders. The company ended Q2/13 with net cash of $20.4 million and available liquidity of $231.7 million — arguably an overcapitalized balance sheet. Since then, the company completed a $100 million substantial issuer bid and started a regular dividend at an annual rate of $0.08/share (5.9% yield). We consider this dividend sustainable given strong available liquidity, and our free cash flow forecast of $0.09/share in 2013 and $0.15/share in 2014.