West Fraser Timber Co Ltd T.WFG

Alternate Symbol(s): WFG

Forest Products Lumber & Wood Production

West Fraser Timber Co. Ltd. is a diversified wood products company. The Company is engaged in manufacturing, selling, marketing and distributing lumber, engineered wood products, including oriented strand board (OSB), laminated veneer lumber (LVL), medium-density fiberboard (MDF), plywood, particleboard, pulp, newsprint, wood chips and other residuals and renewable energy. Its products are used in home construction, repair and remodeling, industrial applications, paper, tissues, and box materials. Its segments include Lumber, North America engineered wood products (NA EWP), Pulp & Paper and Europe EWP. Its business comprises lumber mills, OSB facilities, renewable energy facilities, pulp and paper mills, plywood facilities, MDF facilities, particleboard facilities, LVL facility, treated wood facility, and veneer facility. The Company operates approximately 58 facilities in Canada, the United States, the United Kingdom and Europe. It also offers wood preservation services.

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West Fraser Timber Co Ltd

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Post by retiredcfon Aug 02, 2023 9:45am

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Post# 35568677

TD

Currently have a US$110.00 target. GLTA

West Fraser Timber Co. Ltd.

(WFG-N, WFG-T) US$86.37 | C$114.20

Pulp Losses Undermine Q2 Results, but Recovery Underway Event

West Fraser reported Q2/23 results after the market closed on July 26. Adjusted EBITDA of $80 million was below our estimate of $143 million and the consensus estimate of $139 million. The reported EBITDA figure included a $21 million pulp & paper segment inventory write-down and a $12 million non-cash prospective ADD expense provision, neither of which was included in our estimate. Positive inventory revaluations at the lumber segment were also below our estimate. Adjusting for these items, core operating results were near our forecast.

Impact: NEUTRAL

Given the early stage of a cyclical recovery, we consider the Q2 earnings variance versus expectations to be minor. We are not making changes to our commodity deck but have adjusted H2/23 price realization spread assumptions to factor in surging North American OSB markets and, to a lesser extent, higher Western SPF lumber prices. We have also increased North American OSB shipment forecasts to align with management's revised guidance. The net effect is a modest increase in our 2023 and 2024 earnings estimates. Our 12-month target of $110/share is unchanged.
Q2 results summary. Better-than-expected Q2/23 EWP (panel) contributions were not enough to offset steep losses at the pulp mills (record-low segment results) and a lower-than-expected rebound for sawmill margins.
2023 guidance updates. The 2023 capex budget range is stable at $500 million- $600 million, but management is pointing towards the bottom end of that range given a relatively slow H1/23 start. The revised North American OSB shipment guidance range is 6.1 billion-6.4 billion square feet (+3% from the previous target).
WFG's net cash position was bolstered by Q2 working capital reductions. Quarter-ending net cash was $494 million ($5.91/share), up from $347 million at the end of Q1. Management is focused on balance sheet flexibility preservation but indicated potential NCIB buyback interest as liquidity has stabilized.

TD Investment Conclusion

We believe investors are not giving West Fraser enough credit for its leading ROCE track record and strong balance sheet, which we argue should support a premium trading multiple. With its balance sheet stabilizing, we believe the company could revisit NCIB activity while sustaining aggressive discretionary capex.