Western Forest Products Inc T.WEF

Alternate Symbol(s): WFSTF

Forest Products Lumber & Wood Production

Western Forest Products Inc. is a Canada-based integrated forest products company building a margin-focused log and lumber business to compete in global softwood markets. The Company’s primary business is the sale of lumber and logs, which includes timber harvesting, sawmilling logs into specialty lumber, value-added lumber and glulam remanufacturing, and wholesaling purchased lumber. It has a lumber capacity of approximately 885 million board feet from six sawmills, as well as operates four remanufacturing facilities and two glulam manufacturing facilities. The Company's product categories include outdoor living, exterior appearance, LIFESTYLE CEDAR, interior living, structural, industrial and WFP engineered products. Its outdoor living products include decking, timbers and fencing products. Its LIFESTYLE CEDAR products include LIFESTYLE CEDAR Decking and LIFESTYLE CEDAR Fencing. Its WFP Engineered Products include curved and arched glulams, straight glulams, and fabricated trusses.

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Western Forest Products Inc

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Post by jonvw92on Jan 06, 2021 8:39pm

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Post# 32239251

TD Upgrade

Action Note

Equity Research

Western Forest Products Inc.

(WEF-T) C$1.25

Upgrading to BUY; Improving Earnings Recovery Visibility Event

We are increasing our Western Forest Products' 12-month target price to $1.65 from $1.05 and upgrading our recommendation to BUY from Hold. The revised target price reflects increases in our mid-term free cash flow estimates and a modest expansion in our adjusted trend EV/EBITDA target multiple (to 5.0x from 4.0x).

Impact: POSITIVE

Western's share price has underperformed its peers over the past two years. In 2020, Western's share price improved only 5% versus an average 46% gain for the company's lumber and engineered wood products peers. Since the trough in late-March, Western's share price has gained 108% (exacerbated by a depressed starting point) — substantially lagging the average peer-group gain of 254% over the same duration. Some company-specific issues that undermined relative performance over the past two years (e.g., labour disruptions and lagging specialty/niche/offshore lumber markets) are in the past.
Positive changes to our earnings outlook are mostly driven by revisions to our lumber price outlook. We have raised our average 2021 Western SPF price forecast by 28% to US$569/Mfbm (still 39% below the current price). More notably for Western, we have also raised price estimates for a variety of relevant specialty, niche, and offshore market grades (e.g., Western Red Cedar, Douglas Fir, and Hemlock squares prices).
We expect that Western's leverage levels will meet management's targets in the near term. Management has articulated a net debt comfort level of $80 million- $100 million. With robust free cash flow forecasts (11% yield estimates in each of 2021 and 2022) and pending asset sales, we expect that the company will reach target levels by early-2021. We believe that Western will eventually accelerate capital deployment; we assume a modest dividend reinstatement starting Q3/21.

TD Investment Conclusion

There are several attributes that distinguish Western from its peer group: 1) a dominant position on the B.C. Coast provides control over fibre flow and supports a flexible operating platform and 2) diverse species and grade mix yield more stable margins over the cycle. Western faces some long-term challenges — including a difficult regulatory environment in B.C. — but at this point, we believe that these issues are fully reflected in the company's valuation.

Company Profile

Western is the largest lumber producer on the B.C. Coast, with seven sawmills (1.1 Bfbm capacity). The company has a diverse and high-quality timber base. It produces a wide range of specialty and commodity lumber and logs for a global customer base. The company's relatively stable peak-to-trough margins differentiate Western from its peers in the wood products sector.

January 6, 2021

Paper & Forest Products

Sean Steuart, CFA
Kasia Trzaski Kopytek, CFA, CPA, CA

Recommendation: BUY Prior: HOLD

Risk: HIGH

12-Month Target Price: C$1.65 Prior: C$1.05

12-Month Dividend (Est.): C$0.03

12-Month Total Return: 34.0%

Market Data (C$)

Current Price 52-Week Range
Mkt Cap (f.d.) ($mm) EV ($mm)
Current Dividend Dividend Yield
Avg. Daily Trading Vol.

Financial Data (C$)

Fiscal Y-E
Shares O/S (f.d)(mm) Float Shares (mm) Net Debt ($mm)
Net Debt/Total Cap BVPS (f.d.)

EBITDA ($mm)
EBITDA ($mm) (old)
EPS (Adj.)
EPS (Adj.) (old)
FCF/Shr (0.08)

Q1 0.00 Q2 0.00 Q3 (0.05) Q4 (0.09)

EV/EBITDA nmf P/E (Adj.) (8.9)x

Lum P $/Mfbm 1,147 Lum Vol MMfbm 548 Log P $/m3 108 US$/C$ 0.75

All figures in C$, unless otherwise specified

75.1

68.5

0.02

0.01

0.08

(0.06) 0.02 0.03 0.03

7.4x 62.5x

1,259 581 102 0.75

C$1.25 $0.58 - $1.41 $469.6 $553.8 $0.00 0.0% 1,701,021

December 375.7 375.7 $83.2 15.0% $1.25

143.3 120.8 100.1 – 0.17 0.13 0.10 – 0.14 0.14

0.11 – 0.03 – 0.03 – 0.01 –

3.9x 4.6x 7.4x 9.6x

1,317 1,187 850 850 105 105

0.77 0.78

Estimates (C$)

Year 2019A 2020E 2021E 2022E

(1.5) – (0.14) –

EPS (Adj.) Quarterly Estimates (C$)

Year 2019A 2020E 2021E 2022E

Valuations

Year 2019A 2020E 2021E 2022E

Supplemental Data

Year 2019A 2020E 2021E 2022E

1.6 1.4 1.2

WEF-T: Price

1.6 1.4 1.2

0.8 0.6 0.4

Mar-20

May-20

Jul-20

Sep-20

Nov-20

0.8 0.6 0.4

Jan-21

Please see the final pages of this document for important disclosure information.

Page 1 of 8

January 6, 2021

Details

Lumber markets are strengthening across Western’s grade spectrum. Exhibit 1 shows indexed price performance across a representative set of the company’s lumber grades. Prices of specialty, niche, and offshore lumber grades (55% of Western’s normalized shipments) generally lagged spectacular gains for commodity grades in 2020. Although commodity lumber markets are starting 2021 near record levels, Western Red Cedar, Japan specialty, and other niche markets are all moving higher in tandem to start the year. Offshore grades were the last to show positive momentum, but Japan markets started improving from November 2020.

Exhibit 1. Key WEF Lumber Grades Price History — Indexed to September 2014

2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6

Sep-14 Sep-15

Sep-16

Sep-17

Sep-18 Sep-19

Sep-20

UnprecedentedrunforNorthAmerican

commodity prices in 2020. Robust domestic repair/remodeling demand has supported a

general uptrend for Western Red Cedar prices.

Prices forexportgradesstartedtopickupin November.

N.A. WRC Decking

N.A. WRC Timbers Japan DFir Sq. Western SPF

N.A. WRC Boards/Trim

Japan Hemlock Sq.

N.A. Dfir Timbers (niche)

Source: Random Lengths Inc.

Ongoing strength in commodity and specialty lumber markets in the U.S. is particularly encouraging, given a reduction in the lumber duty deposit rate on Canadian lumber shipments to the U.S. that took effect at the end of November 2020. The combined “all others” countervailing and anti-dumping deposit rate dropped to 8.99% from 20.23%. Assuming that U.S. demand will stay strong in early-2021, Western will benefit from sustained robust pricing (especially for Western Red Cedar) and lower duty expense/deposit rates.

Outlook

Recent discussions with management indicate an expected return to normal lumber shipment levels starting in Q4/20, with incremental volume directed to strong North American commodity markets. At the margin, the company is repositioning its log resource towards domestic markets and away from offshore sales. Restrictive changes to B.C.’s Manufactured Forest Products Regulation, which took effect in Q4/20, incentivize a higher degree of specialty timber/lumber processing on the Coast. Western expects to manage the new regulation without a material financial impact, but it may invest in additional kiln-drying or planer capacity.

Page 2 of 8

Indexed to 1.0 at September 1, 2014

Exhibit 2. Western Forest Products Inc. Relative Valuation

January 6, 2021

Western has adopted a cautious approach to capital allocation, but the company is expected to reach debt targets in the near term. Following a lengthy Coastal strike in 2019/early-2020 and in the initial wake of the pandemic, Western pulled back on capex and suspended the regular dividend in Q2/20. Management has articulated a target of reducing net debt to $80 million–$100 million (versus $119 million in net debt at the end of Q3/20). With constrained near-term capex, we expect that management will reach this objective shortly, considering a couple of factors: 1) our forecast of strong free cash flow (average annual yield of 11% in each of the next two years) and 2) the pending sale of an ownership interest in TFL 44 and Alberni Pacific Division Sawmill ($36.2 million in proceeds). Without an increase in capex, or discretionary acquisitions, we forecast that Western will exit 2021 with a minimal net debt-to-cap ratio of 2.2%.

Management has reiterated a cautious capital-allocation policy, but with our expectation of rapid balance-sheet improvement, we have factored the resumption of a dividend starting in Q3/21 (at a modest annual yield of 4%). We also expect that Western will expand efforts to diversify its operating base. The company has taken a gradual approach to acquisitions in the U.S. Pacific Northwest and investments in establishing a wholesale business, but refocusing on these types of initiatives is possible as the balance sheet improves. We do not believe that Western’s growth aspirations are necessarily limited to lumber.

Valuation

Western is currently trading at 3.9x 2021 TEV/EBITDA — below the peer-group average of 4.8x and the 10-year average forward multiple of 6.0x for the company based on consensus 12-month forward EBITDA. We consider the current valuation compelling relative to peers and historical trading parameters.