CIBC UpgradeEQUITY RESEARCH
May 13, 2022 Earnings Update
INTERFOR CORPORATION
Pure-play LumberCo With Attractive Growth Prospects
Our Conclusion
We reiterate our Outperformer rating on Interfor and increase our price target
to $45 (from $42) on increased valuation parameters (partially reflects upside
from the M&A optionality associated with the GreenFirst investment). Over
the past 18 months, IFP has been the fastest-growing lumber company in
North America, making well-timed acquisitions that have significantly
increased its presence in the U.S. South (acquiring one mill from WestRock
and four from GP) and provided a new platform for growth in Eastern Canada
(via the purchase of EACOM and its seven sawmills). With strong free cash
flow generation, we suspect IFP may consider initiating an SIB later this year
after having maxed out its NCIB in April.
Key Points
Increasing 2022/2023 EBITDA Estimates By 4%/3%: We have increased
our Q2 EBITDA estimate from $391MM to $453MM on higher near-term
realization assumptions. We now see full-year EBITDA of $1.5B, before
levels moderate to $622MM in 2023E as wood product prices come off
elevated levels. We expect IFP to generate close to $1B in free cash flow in
2022E and ~$340MM in 2023E (19% yield). While IFP is trading at 4.9x our
mid-cycle EBITDA forecast (~$450MM) based on the Q1/22 balance sheet, if
we assume our 2022 price deck plays out, the multiple would drop to 3.3x by
year-end (well below the five-year average of ~5.5x despite structural
improvements to the lumber industry in recent years).
New Res Demand For Wood Should Remain Strong Over 2022: While we
believe dangers from a further material rise in mortgage rates remain a major
risk factor for the building products complex in coming months, mortgage
spreads over treasuries will likely narrow (tempering further rate increases),
commodity prices appear to have already found a near-term floor (at still
elevated levels) and valuations of wood equities remain compelling at these
levels.
At the same time, builders have moved quickly to roll out extended rate
locks, which may secure most of their backlog through year-end. While
average monthly payments are up over 50% Y/Y with two years of high-teen
annual home price appreciation and a ~230 bps increase in mortgage rates
since late December, extended student loan forbearance (with no accrued
interest) has likely funded down payments for many first-time buyers (though
admittedly the recent crypto meltdown may weigh on some millennial buyers’
finances).
Attractive Capacity Valuation: We estimate Interfor is trading at only
~US$355/mfbm for its 4.9 Bbf/yr platform (almost half of which is in the U.S.
South), a steep ~55% discount to replacement costs (now over
US$800/mfbm for a greenfield). This analysis ignores any value for the
lumber duties on deposit (~$360MM as of Q1).