Our view: We continue to like West Fraser’s low-cost focus and strong balance sheet (i.e., a significant net cash position) in a demand environment that is seeing affordability headwinds, and reiterate our Outperform rating.
Key points:
Revising price target to $95 (down from $100) and reiterating our Outperform rating – Our price target is based on a blended ~5.5x multiple on our Trend EBITDA of $1,450MM (85% weighting) and our 2024E EBITDA of $636MM (15%).
Near-term demand looking softer; medium-term outlook remains healthy. With signs of cooling in market demand, West Fraser expects SYP shipments to be at the bottom of its 2.9–3.1 Bbf guidance range. It also expects its European OSB shipments to be near the bottom of its guidance range of 1.0–1.2 bsf on continued near-term demand weakness. While affordability concerns are a headwind for the near-term, management continues to hold a more optimistic view of the medium-term given cumulative underbuilding and aging housing stock.
Capex guidance for 2023 moves lower, but it's "full steam ahead" on capital projects. West Fraser now expects to invest $450MM in 2023, down from the lower end of its prior $500–600MM guidance range, due to lengthened lead times for projects under way or planned. With that, West Fraser now expects the brownfield modernization of its mill in Henderson, Texas to start up in Q424 (from Q224 previously). Management noted that there are still significant capital projects moving through the industry's supply chains, and that accessing labour/contractors is still challenging. However, the company also indicated that it continues to develop a pipeline of organic capital projects to improve cost competitiveness.
Not seeing meaningful movement on the softwood lumber duties file.
While softwood lumber duties have been somewhat more topical over the last several months, with several industry contacts noting a pick- up in discussions, West Fraser's commentary was less optimistic, with management still not indicating improving visibility to a resolution. West Fraser had US$824MM of duties on deposit as of the end of Q323.
Sharpening the focus on building products. West Fraser expects the sale of the Hinton pulp mill, as well as the Quesnel River and Slave Lake pulp mills, to close in “early 2024”.
Seeing value in its own shares. Management disclosed that it repurchased $53MM of its shares between end of Q3 and October 24, a period in which the company's share price has trended lower. Given West Fraser's strong balance sheet position and the relative weakness in its share price, we expect share repurchases are likely to continue.