CIBCEQUITY RESEARCH
September 21, 2022 Industry Update
Interfor’s Growth Plan Coming Into View
Mid-week Update
Key Points
Interfor Points To Stronger Mid-cycle Profitability Than Most Sell-side
Forecasts: While we are in Montreal this week at CIBC’s Eastern
conference, Interfor is hosting a multi-day analyst/investor tour in the South.
The presentation material for the tour (posted on Tuesday) outlines
Interfor’s longer-term aspirations. Based on its ongoing capex plan (including
spending ~$450MM in the U.S. South on strategic capex between H2/22 and
2025), IFP outlined a production target of 4.8 Bbf for 2025 (up from 4.2 Bbf
run-rate today) through incremental benefits from in-progress strategic
capex, with a long-term aspiration of producing 7.0 Bbf by 2027 (+11%
CAGR over 2022E-2027E; assumes additional M&A and/or strategic capex).
Average production per Southern mill is ~158 mmfbm/yr this year (vs. 108
mmfbm/yr in 2016), with a target of achieving 192 mmfbm/yr in 2025.
IFP believes its ongoing investments (with minimal hurdles of 12% pre-tax
FCF) will position the company to have the capacity to generate mid-cycle
EBITDA of C$504MM by 2025 (up from a theoretical C$420MM today). This
is 12% higher than our current mid-cycle estimate on the company of
C$450MM. Interfor’s analysis assumes a mid-cycle EBITDA margin of
C$105/mfbm, up from the ~C$100/mfbm mid-cycle of the current asset base
(but conservatively less than the C$138/mfbm average over the last decade).
With maintenance capex expected to hold at C$60MM/year (~C$2MM/mill
annually), and based on an average debt fixed interest rate of ~4% and a
~25% cash tax rate, IFP is pointing to mid-cycle free cash flow potential of
C$320MM by 2025 (24% higher than theoretical 2022E mid-cycle levels).
SPF Lumber Stabilizes Above $500 While SYP Pricing Deteriorates:
Random Lengths’ mid-week prices (published Tuesday evening) showed
mixed benchmark pricing changes. On the lumber side, W. SPF prices held
steady since Friday at $520/mfbm (+4% Y/Y), while SYP 2x4 prices fell 2.9%
or $18 to $600/mfbm. Since early May, SPF prices are down 52%, while
SYP is off 28%. The Random Lengths Lumber Composite declined 1% since
Friday to $534. In SPF, while prices steadied on better-than-expected
housing starts and the curtailment announced by Canfor on Monday, buyers
remained reluctant to replenish lean inventories. In SYP, prices declined
following a more active pace last week.
On the OSB side, pricing in the North Central region (key benchmark)
remained stable at $360/msf (-22% Y/Y). Pricing in the South East was also
unchanged at $330/msf, while Western Canada decreased 1.8% or $5 to
$280/msf. North American OSB prices are off 53%-57% since mid-May.
Random Lengths indicated that sales volumes remained modest as buyers
continued to replenish cautiously against a backdrop of concerning economic
news. While prices remained stable in most regions, limited discounts were
reported in Western Canada. Canadian plywood declined 2.0% or C$15 to
C$724/msf (+30% Y/Y)