West Fraser Timber Co. Ltd.
Focused on the positive long term fundamentals
Our view: West Fraser reported Q222 Adjusted EBITDA of $345MM (adjusted for an $81MM duty recovery) compared to our estimate of $350MM and consensus of $366MM. We think West Fraser's low-cost focus and strong balance sheet should help it navigate lower demand in the near-term and reiterate our Outperform rating.
Key points:
Reiterating our $110 price target and Outperform rating – Our price target is based on a blended ~6.0x multiple on our Trend EBITDA of $1,450MM (85% weighting) and our 2023E EBITDA of $1,140MM (15%).
Management expects solid returns on Henderson – At a headline build cost of $255MM and capacity of 275 mmfbm (i.e., ~$927/mfbm), the project looks relatively expensive on a capacity basis, although not entirely out of line with other recently announced projects such as Canfor's rebuild near Mobile (~$840/mfbm; please click here), or Tolko-Hunt's project on the site of Hunt's existing mill in Taylor, Louisiana (~$750/mfbm; please click here). It is also close to the ~$905/mfbm West Fraser paid to acquire the Angelina Forest Products mill (please click here). Management expects the mill's mid-cycle EBITDA to increase nearly four-fold and for the project to generate a 12% after-tax IRR on "conservative assumptions"; please see Exhibit 2 for more information.
Allendale start-up timing still uncertain – While West Fraser disclosed that the Allendale OSB mill is tracking to be ready at the end of Q123 (versus "in" the quarter previously, with the company noting supply chain issues), it also continues to describe the mill as being prepared for "an eventual restart when warranted by customer demand." With 40% of planned staffing in place, we think the company is positioning itself to be ready to open the mill, although we think the urgency to do so has diminished with lower product pricing. Allendale should eventually be a lower-cost OSB mill in West Fraser's portfolio, which suggests it would be well positioned for a lower price environment, but we note a two-to-three year ramp up period to achieve run-rate operations.
Recent capacity cuts in BC likely a sign of things to come – West Fraser announced in August that it would permanently curtail approximately 170 mmfbm of combined production at its Fraser Lake and Williams Lake sawmills, and approximately 85 mmsf of production at its Quesnel plywood mill, with the capacity reductions occurring over the course of Q422. With a long-term overhang of declining fiber supply in the province, we expect that a more challenging wood products demand outlook for 2023 (notwithstanding an R&R outlook that continues to look relatively robust) could drive more rationalization of capacity in the province across the industry, including for West Fraser.