Our view: We positively view the announcement of a US$1.25 billion substantial issuer bid. We think the move is consistent with management's commitment to returning capital to shareholders and is well within the company's capacity given its significant cash on hand and its expected free cash flow generation through H2/22 in particular. Further, we think the pullback of nearly 20% in the share price over the last month provides a reasonable window to be opportunistic and pursue share repurchases.
First impression:
West Fraser announced that it will commence a substantial issuer bid ("SIB") that will allow the company to repurchase up to US$1.25 billion of its outstanding common shares. The SIB will proceed via modified Dutch auction, with a tender range of US$80-95 per share. Based on the minimum purchase price, the SIB would be for up to ~15% of the total number of shares outstanding as of April 19, 2022, compared to ~13% at the maximum purchase price. West Fraser has suspended repurchases under its normal course issuer bid ("NCIB"), which it renewed on February 17, 2022, until the expiration of the offer on June 2, 2022.
We expect significant free cash flow in 2022 in addition to its large existing cash position. We expect West Fraser to generate ~US$2.6 billion in free cash flow in 2022, which in addition to the ~US$1.6 billion in cash reported at Q4/21, puts the company in a strong liquidity position to pursue share repurchases. We expect approximately 70% of free cash flow generation to occur in H1/22 from strong earnings in both the lumber and OSB businesses. We believe that West Fraser will continue to benefit from lower operating costs in the US South.
Following the same playbook as 2021. West Fraser also announced an SIB program in mid-2021 against a backdrop of strong liquidity and free cash flow generation. The C$1 billion SIB program resulted in the repurchase of 10.3 million shares, or approximately 8.7% of West Fraser’s outstanding shares and Class B shares at the time the SIB was announced in early July 2021. Please click here to read our thoughts on the 2021 program.
West Fraser will report its Q1/22 results on April 28, 2022. We expect West Fraser to benefit from strong lumber and OSB pricing in Q1/22 despite the supply chain disruptions experienced by the industry. Our Q1/22 EBITDA and EPS estimates of $1.577 billion and $10.91, respectively, compare to consensus of $1.307 billion and $7.80, respectively. Please click here to access our Q1/22 preview for the Paper, Packaging & Forest Products coverage group