Our view: We continue to like West Fraser’s low-cost focus and strong balance sheet (i.e., a net cash position), and think the company will benefit from improving wood products demand as 2024 progresses as well as capacity constraints in lumber. While we think recent and near- term capacity additions could put downward pressure on the OSB market, pricing remains supportive for now. We reiterate our Outperform rating.
Key points:
Maintaining our $97 price target and Outperform rating – Our price target is based on a blended ~6.1x multiple on our Trend EBITDA of $1,300MM (85% weighting) and our 2024E EBITDA of $823MM (15%).
Warm weather limiting availability of logs in Western Canada.
Management called out warm weather in Western Canada as negatively impacting logging activity so far this winter, which has limited the accumulation of log inventories at some of its mills, and could potentially constrain the company's ability to manufacture and ship SPF lumber. The winter logging season will continue until late March, but we think the situation poses a potential risk to shipments in Q2. However, we would suggest that lower log availability (and therefore lumber production) across the industry could also translate into stronger SPF pricing, all else equal.
We continue to see favourable supply-side drivers for lumber more broadly. West Fraser noted that its recent closure of its Fraser Lake sawmill reflects the complexity of the operating environment in British Columbia, and constraints on the availability of economic fiber. Without significant policy changes, it expects the forest sector in the province to contract further. More broadly, it expects challenges to meaningful lumber capacity additions to persist across North America. Outside of West Fraser's Fraser Lake, Maxville and Huttig announcements, we have seen capacity reductions this year from Interfor, Tolko, Rosboro, and Hampton. We think that closures could take some time to be felt, but are helping to set up the market for a tighter H2/24 from a supply perspective.
Management is seeing some cost relief. Management expects costs and availability constraints for transportation, raw materials (e.g., resins and chemicals) and energy to moderate over the near term, while labour availability remains challenging. It expects BC stumpage rates to decrease modestly through much of Q124 before stabilizing into Q224, and for average log costs across the U.S. South in 2024 to be largely similar to those of 2023.
Active on the buyback. West Fraser bought back 1.5MM shares for aggregate consideration of US$104MM in Q423, implying an average price of just under US$70/share. The company also disclosed it has repurchased another ~44k shares to date in 2024.