TD 2 West Fraser Timber Co. Ltd.
(WFG-N, WFG-T) US$80.61 | C$108.47
N.A. EWP Contribution Supports Q4; Cautious 2024 Volume
Guidance
Event
West Fraser reported Q4/23 results on February 14 after market close. While still
near a cyclical trough, adjusted EBITDA of $97 million was well above our
estimate of $34 million and also slightly higher than the consensus forecast of
$92 million. Contributions from the North American EWP (mostly OSB) and pulp &
paper segments were better than we expected.
Impact: NEUTRAL
We are encouraged by Q4/23 results, but have tempered 2024 and 2025 estimates,
partly to reflect more conservative shipment forecasts for key segments (aligns with
management guidance and recent lumber capacity reduction announcements). Our
12-month target price of US$115/share is unchanged.
On a segmented basis, earnings contributions from North American panel
(EWP) operations and pulp & paper assets exceeded our forecasts. Those
positive variances more than offset steeper-than-expected losses at WFG's
sawmills. Impressive margins for WFG's OSB operations reflect resilient price
realizations (also evident in WY and LPX Q4 results).
Cautious 2024 shipment guidance ranges indicate expected minor y/y
variances. At the guidance midpoint, lumber shipments would decline modestly
y/y, partly reflecting recent/pending sawmill closures. Management expects flat
costs for fibre and freight, labour cost inflation, and relief for resin costs.
The 2024 capex budget of $450-$550 million is consistent with our previous
estimate. The midpoint represents >90% of expected depreciation and on a
relative basis should stack up as an aggressive plan versus wood-weighted peers.
WFG's year-ending net cash was $401 million ($4.91/share, or 6% of the
current share price). Available liquidity is $1.95 billion. WFG bought back 1.5
million shares during Q4/23 (2% of the total) for $104 million.
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 wider
valuation premium versus its peers. We expect the company to balance NCIB activity,
ongoing aggressive discretionary capex, and opportunistic M&A activity.