TD They have a US$115.00 target. GLTA
West Fraser Timber Co. Ltd.
(WFG-N, WFG-T) US$82.98 | C$112.00
Fraser Lake Sawmill Closure Follows Recent U.S. Supply Reduction
Event
Yesterday evening, West Fraser announced plans to permanently close its
Fraser Lake, B.C. sawmill (annual capacity of 160 million board feet). This
measure follows a similar announcement two weeks ago related to closure of two
sawmills in the U.S. South (see TD Flash Note). West Fraser expects combined
restructuring and impairment charges of ~$81 million related to this initiative in
Q4/23 ($0.97/share, pre-tax). The Fraser Lake closure will take effect following
an orderly wind-down (we anticipate Q1) and represents 5% of West Fraser's
Western Canadian capacity, 2% of the company's total lumber capacity, and 0.2%
of aggregate North American capacity.
Impact: SLIGHTLY POSITIVE
As Fraser Lake had run on a one-shift basis since Q3/22, the effective
production impact is minor, but we are encouraged that the industry leader
continues to lead supply-reduction initiatives. We anticipate that other producers
will follow with capacity closures in the coming months.
This announcement is consistent with our broad expectation that lumber
capacity growth in the U.S. South will be mitigated by permanent closures
of B.C. capacity. We forecast net North American lumber capacity CAGR of 1.2%
through 2025. Management noted that the Fraser Lake closure is motivated by a lack
of economic log supply in the region. At current prices, we estimate that a significant
portion of the North American sawmill industry is EBITDA-negative.
Softwood lumber prices are searching for traction. The benchmark Western SPF
2x4 lumber price as of last Thursday is $442/Mfbm, relatively unchanged over the
past three weeks, but up 19% versus the late-October low. The current Southern
Yellow Pine 2x4 lumber price is $445/Mfbm, down 17% from the mid-September
peak.
West Fraser retains a flexible balance sheet and is active on its buyback.
Q3/23-ending net cash was $705 million ($8.44/share, or 10% of the current share
price). Quarter-ending available liquidity was $2.3 billion. Buybacks in October and
November totalled 1.4 million shares (2% of the total) for a consideration of $99
million. The company has 2.3 million shares remaining under its current NCIB which
expires on February 26.