Raymond James With October as “historically the seasonal entry point,” Raymond James analyst Daryl Swetlishoff thinks it’s “the time is right to add to Paper & Forest Product company positions.”
“After falling precipitously over the summer both SPF and SYP lumber as well as OSB appear to have bottomed and have ground higher in recent weeks,” he said. “Pulp markets have also remained resilient in Europe while downward pressure in NA and China remains a key issue despite unplanned downtime and ongoing logistical issues weighing on supply. Lumber futures markets have performed even better and now sit at a marked premium to current cash markets. We expect a combination of better retail demand along with B.C. interior curtailments to support markets even as Pro Dealer/Home builder shipments are impacted by ongoing logistical issues.
“Despite recent share price appreciation we continue to see generous upside in shares and submit that the market is undervaluing the impact of 1H21 FCF. In particular, we expect aggressive year-to-date share repurchases underpin value and could lead to multiple expansion with reduced free floats leading to a ‘share paper shortage’ when generalist investors return in earnest. Lastly, we highlight that historically, building materials producer shares have shown strong seasonality with October being the prime month to build/add to positions.”
In a research note released Wednesday, Mr. Swetlishoff trimmed his target prices for five stocks in his coverage universe after reducing his third-quarter earnings estimates to adjust for lower building materials pricing.
His changes were:
- Canfor Corp. (CFP-T, “strong buy”) to $47 from $50. The average on the Street is $40.67.
- Conifex Timber Inc. (CFF-T, “outperform”) to $3.25 from $3.85. Average: $3.20.
- Interfor Corp. (IFP-T, “strong buy”) to $57 from $61. Average: $44.83.
- Western Forest Products Inc. (WEF-T, “outperform”) to $2.90 from $3. Average: $2.77.
- Mercer International Inc. (MERC-Q, “strong buy”) to US$18 from US$21.50. Average: US$15.80.
“We note modest (less than 5-per-cent) target price reductions for Interfor, Canfor and Western Forest, while West Fraser’s target [$170] remains unchanged which is largely attributed to the company’s significantly reduced share count following the recently completed Substantial Issue Bid (SIB) and extensive action on the NCIB,” the analyst said. “We continue to see compelling value in building materials stocks, with a healthy 56-per-cent average total return to target with 2021 Best Pick Interfor boasting 84-per-cent upside. We further note that our target multiples remain conservative ranging from 4.5-6.0 times which largely represents the lower end of long term historical averages among our coverage.”