WEST FRASER TIMBER CO. LTD.
Well Positioned To Navigate Volatile Wood Products Markets
Our Conclusion
While the wood products industry is lacking in near-term catalysts, we are
reiterating our Outperformer rating on West Fraser given attractive longer-
term valuation metrics and favourable medium-term demographic tailwinds
for housing. At the same time, we see an increasing likelihood of the
depressed lumber market accelerating permanent supply reductions in BC.
We continue to believe the company’s strong balance sheet can support a
balanced approach to capital allocation, while providing the company
flexibility to consider additional growth opportunities in wood products.
Key Points
Moderating 2023/2024 EBITDA Estimates By 3%/5%: We have reduced
our Q4/23 and full-year EBITDA estimates by 11% and 3%, respectively, to
$90MM and $512MM. The reductions largely reflect weaker near-term
realization assumptions in lumber. Our 2024 EBITDA estimate moves 5%
lower to $971MM, and our new 2025 estimate is set at $1.46 billion (when
we have SPF lumber at $490/mfbm and OSB NC at $400/msf). Our 2024
estimates for WFG assume an OSB NC price of $365/msf (spot = $375),
SPF lumber price of $415/mfbm (spot = $370) and SYP lumber forecast of
$415/mfbm (spot = $402). Our year-ahead OSB pricing assumption is close
to spot levels given additional supply ramping up over the next 12 months
(West Fraser’s recent Allendale addition and capacity adds from
RoyOMartin/Tolko in Q4/23 and early 2024, respectively).
Mixed Housing Trends: On the new residential side (58% of 2022 OSB
consumption and 32% of lumber demand), we expect U.S. housing starts to
average 1.45MM in 2024 (September permits were 1.47MM) and 1.58MM in
2025. While headline 30-year mortgage rates remain very high at 7.9%,
active use of forward commitments, traditional rate buydowns (capped at 6%
of the home sales price) and other incentives mean some builders are
investing a double-digit percentage of the new home price in incentives
[allowing for real-world major builder full-term buydown rates sub-4.875%
(FHA loans) and 5.99% (non-FHA) on spec inventory]. In the R&R market
(25% of 2022 OSB demand and 41% of lumber consumption), JCHS’
Leading Indicator of Remodeling Activity (LIRA) is forecasting the four-
quarter moving rate of change for U.S. R&R spending will fall from 5.4% Y/Y
growth in Q3/23 to negative comps of -2.7% by Q1/24 and a 7.7%
contraction by Q3/24.
Attractive Valuation: We estimate West Fraser is trading at only 3.0x mid-
cycle EBITDA ($1.6 billion), a steep discount to its historical average of 5.7x.
WFG’s price to tangible book of 1.3x is also well below the 2.2x average over
the past 20 years. On a capacity basis, we estimate West Fraser is trading at
a ~59% discount to replacement value (based on replacement costs for
lumber of ~$800/mfbm and OSB/plywood replacement costs of $600/msf).
This ignores any value for the lumber duties on deposit (~$824MM or
~C$13.60/share as of Q3) or the remaining pulp and paper assets.