Key points:
Higher OSB prices raise our financial forecasts – Back in April, we thought we were aggressive with our upwardly revised OSB price deck but it turned out to be conservative. Solid demand together with help from a number of BC fires and a couple of hurricanes has pushed OSB prices to near record levels. As a result, we are increasing our 2017 NC price forecast to $350/ msf (from $320), our 2018E price to $325 (from $300) and moving up our 2019 price to $300E (from $275).
Revising US housing forecast a bit lower - On a YTD basis, 2017 has been an interesting year with total starts up 2.7% with single family up 9% and multi-family down 10%. As single family starts drive OSB use (3x vs. multi), US consumption is up 4.3% in H117. Our revised 2017 US housing starts forecast is 1.205MM (from 1.250MM) and we are moving 2018E to 1.30MM (from 1.35MM) and 2019E to 1.425MM (from 1.475MM).
Investors remain focused on supply additions – Given the industry's unfortunate history of over-supplying the market in 2002, 2006, 2010 and 2013, it's no wonder that investors are more than a little concerned on restarts and new mill starts. Our revised OSB supply-demand model has the industry operating rate at 94.7% in 2017 (which speaks to the current high price environment) and 95.3% in 2018. With this outlook, we see very robust pricing over the next few years. Despite production ramping up from five mill starts/restarts over 2018/19, operating rates should improve further in 2019 if housing starts reach 1.425MM and repair and renovation demand picks up as expected.
European expansion expected to deliver in 2019 - Norbord's Inverness OSB mill expansion is on the cusp on producing its first board now that its $135MM Capex project is wrapping up. The mill's production base has been increased from 395 mmsf to 720 mmsf and we expect margin expansion through significant cost reductions over time.
Norbord has a significant OSB runway - In addition to restarting Huguley, AL (500 mmsf) before the end of the year, the company has an idled mill in Chambord, QC (470 mmsf). We also highlight that Norbord has a relatively easy 150 mmsf addition at Huguley, if they choose to mirror the wet-end project they did at Joanna, SC (Huguley's sister mill).
Revising our estimates higher – 2017E EBITDA goes to $681MM (from $612MM), 2018E EBITDA goes to $667MM (from $634MM) and 2019E EBITDA goes to $691MM (from $551MM).