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 Sep 27, 2023 9:14am

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Post# 35656487

TD

This is a USD target. GLTA

West Fraser Timber Co. Ltd.

(WFG-N, WFG-T) US$72.28 | C$97.73

Deal to Sell BCTMP Mills Further Shrinks Pulp Footprint Event

We are resuming coverage of West Fraser following the announced agreement to sell the Quesnel River Pulp (QRP) and Slave Lake pulp mills to Atlas Holdings, a private company, for proceeds of $120 million. The QRP (B.C.) and Slave Lake (Alberta) mills have cumulative annual bleached chemical thermo- mechanical pulp (BCTMP) capacity of 690,000 tonnes. Post-sale, West Fraser's remaining pulp & paper facilities will be 50% ownership stakes in the Cariboo NBSK pulp mill (B.C.) and the Alberta Newsprint Co. mill.

Impact: NEUTRAL

This is not a transformative transaction; our $110.00 target price is unchanged. We estimate that the two mills contributed ~5% of aggregate LTM sales.
Terms appear reasonable for West Fraser. Although the asset sale is arguably mistimed versus the commodity cycle (BCTMP pulp prices have only just started to emerge from a deep cyclical trough), we believe that valuation parameters are fair. The implied capacity multiple of $174/tonne is a steep discount to replacement cost, but we would estimate that the trend (mid-cycle) EV/EBITDA multiple is ~4.0x. We believe that this multiple is reasonable, given long-term competitive headwinds for the BCTMP sector.
We are supportive of West Fraser shrinking its pulp and paper (P&P) footprint. Although the BCTMP mills were productive and believed to be substantially more profitable over the cycle than the Hinton, Alberta unbleached softwood kraft pulp mill (a separate agreement to sell this asset to Mondi for $5 million was announced in July), P&P losses were a drag on overall results for an extended period.
Management presentations at our annual Forest Products Forum yesterday suggest no change in strategy. Incoming CEO Sean McLaren has a strong operations track record at West Fraser, and management indicated a bias towards continued growth for the wood-product platform in North America and Europe.

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 higher trading multiple. We expect a near-term capital-allocation bias towards rising discretionary capex, complemented by prospective wood-products M&A.