West Fraser Timber Co Ltd T.WFG

Alternate Symbol(s): WFG

Forest Products Lumber & Wood Production

West Fraser Timber Co. Ltd. is a diversified wood products company. The Company is engaged in manufacturing, selling, marketing and distributing lumber, engineered wood products, including oriented strand board (OSB), laminated veneer lumber (LVL), medium-density fiberboard (MDF), plywood, particleboard, pulp, newsprint, wood chips and other residuals and renewable energy. Its products are used in home construction, repair and remodeling, industrial applications, paper, tissues, and box materials. Its segments include Lumber, North America engineered wood products (NA EWP), Pulp & Paper and Europe EWP. Its business comprises lumber mills, OSB facilities, renewable energy facilities, pulp and paper mills, plywood facilities, MDF facilities, particleboard facilities, LVL facility, treated wood facility, and veneer facility. The Company operates approximately 58 facilities in Canada, the United States, the United Kingdom and Europe. It also offers wood preservation services.

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West Fraser Timber Co Ltd

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Post by retiredcfon Feb 16, 2021 8:42am

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Post# 32571568

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West Fraser Timber Co. Ltd.

(WFG-N, WFG-T) US$74.40 | C$94.24

Strong Q4 Margins; Earnings Poised for Further Near-term Growth Event

West Fraser and Norbord reported Q4/20 results, separately, after the market closed on February 11. Aggregate adjusted EBITDA of US$743 million was a little below our estimate of US$757 million. Our estimate was net of recurring duty expense, but did not include a retroactive duty recovery of US$95 million related to a favourable administrative review. Q4/20 Adjusted pro forma EPS of US$3.93 was near our forecast of US$3.86. We do not consider consensus to be a useful reference this quarter.

Impact: SLIGHTLY POSITIVE

Aggregate Q4/20 operating results were close to our estimates, but we are increasing our mid-term forecasts. Positive revisions reflect encouraging lumber and pulp 2021 volume forecasts from management and favourable changes in price realization spread assumptions. We are not adjusting our commodity deck forecasts, but exceptional North American wood product price momentum continues and pulp prices are surging from a low base.
Tempered capital-allocation approach out of the gate. West Fraser kept its modest dividend and announced a 5% NCIB. Management indicated a preference for a cautious near-term approach, given Q1/21 working-capital requirements. On a pro forma basis, West Fraser ended 2020 with negligible net debt and available liquidity of US$2.3 billion. We forecast FCF yields of 16% in 2021 and 10% in 2022.
Management expects that the integration of Norbord will progress relatively quickly. We believe that the company is well-positioned to consider more aggressive discretionary capex and prospective M&A.
We are increasing our 12-month target price to US$91.00 from US$86.00. The revision reflects higher free cash flow forecasts through 2022. Adjusted for free cash flow estimates, we estimate a trend EV/EBITDA multiple of 5.6x, matching the company's wood products peer-group average. We argue for a premium.

TD Investment Conclusion

The acquisition of Norbord is a major initiative for West Fraser that significantly increases the company's scale and product breadth. We expect that West Fraser will remain aggressive in pursuing asset-base growth while returning surplus capital to shareholders. In our view, West Fraser is attractively valued, especially given our forecast of above-trend mid-term free cash flow.