TD Notes INDUSTRY UPDATE
FOREST PRODUCTS Q1/24 PREVIEW: SLOW CLIMB OUT OF THE TROUGH
THE TD COWEN INSIGHT
Earnings season for our forest products coverage universe starts April 23. We expect below-consensus Q1/24 adjusted EBITDA for four of the nine equities under coverage. Disappointing results are expected for companies exposed to sluggish U.S. South lumber markets (WFG, which is expected to benefit from surging North American structural panel prices towards the end of the quarter, is an exception).
Notable commodity deck revisions: higher mid-term OSB and pulp expectations; lower near-term SYP lumber forecast. To reflect a 36% rally over the past seven weeks, we are raising our average North Central OSB price forecast 18% in 2024 to US$436/Msf and 4% in 2025 to US$390/Msf. In aggregate, our 2024 and 2025 adjusted EBITDA estimates increase 16% and 3%, respectively.
Some minor target price adjustments; no rating changes. Target price increases for some names reflect higher mid-term FCF estimates (WFG, LPX and MERC). For others, we have contracted target multiples.
We reiterate our view that most lumber-weighted equities are undervalued. Despite a plateau setting in for interest rates and resurgent new home construction trends since late-2023, equity valuations in the group have struggled for traction. Sawmill capacity closure initiatives are expected to yield better operating rates once the industry works through surplus inventory in the coming months. Lumber-weighted equities are trading at average multiples of 0.6x P/BV and 3.1x estimated trend EV/EBITDA, well below long-term averages for both metrics despite superior balance-sheet strength versus past cycles. Our top pick is WFG.