West Fraser Timber Co Ltd T.WFG

TD Upgrade

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These are US$ targets. GLTA

West Fraser Timber Co. Ltd.

(WFG-N, WFG-T) US$74.17 | C$93.77

Upgrading to ACTION LIST BUY After Recent Correction Event

We are raising our earnings estimates for West Fraser to reflect positive revisions to our 2022 and 2023 commodity price deck across lumber, structural panels, pulp & paper (tempered by higher cost and lower volume assumptions). To reflect a more cautious valuation environment, we are lowering our adjusted trend EV/EBITDA target multiple to 5.5x from 6.2x previously. The net impact is a lower 12-month target price of $120.00 (down from $125.00). Given a sharp share-price and valuation correction since mid-January, we are comfortable upgrading our rating to ACTION LIST BUY from Buy.

Impact: POSITIVE

• Notwithstanding weaker lumber and panel prices in recent weeks, strong commodity price momentum through most of Q1/22 necessitates higher wood product price estimates. Our average 2022 benchmark wood product price forecasts increase 15% for Western SPF lumber (to $834/Mfbm) and 46% for North Central OSB (to $737/Msf). Our 2023 wood-product price assumptions increase as well, although not as materially. We are also raising our average 2022 and 2023 pulp-price estimates across relevant regions/grades. Other changes include higher cost forecasts (inputs and freight) and lower near-term volume estimates (ongoing shipping headwinds and recent company-specific initiatives).

• The exceptional free-cash-flow window is expected to extend into 2023. Based on our revised forecasts, implied annual FCF yields are 24% in 2022 and 13% in 2023. We believe that the company is poised to complement asset- base growth initiatives with ongoing aggressive capital returns to shareholders. Adjusted for expectations over the next two years, we estimate that West Fraser is trading at a steep discount to pro forma book value (0.7x 2023E P/BV) and 2.6x trend EV/EBITDA (long-term average >5.5x).

   West Fraser's share price has declined 28% from the Q1/22 peak. This pullback is consistent with direct comps, but, in our view, opens a compelling investment window, given the company's long-term ROCE track record, robust capital structure, and scale.

  TD Investment Conclusion

  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.