Conifex Timber Inc T.CFF

RayJay on CFF

[sculpin2]

CONIFEX TIMBER INC.  (CFF-TSX) Forest Products | Building Materials Daryl Swetlishoff, CFA | 604.659.8246 | [e-mail] Bryan Fast, CFA | 604.659.8262 | [e-mail] Christian Reiter, MSc (Associate) | 604.659.8380 | [e-mail]

3Q20 Miss; Outlook Brightens on Tightening Lumber Markets

RECOMMENDATION Our Outperform rating on Conifex reflects a high degree of timber self-sufficiency, stability and cash flow diversification provided by Bioenergy operations along with earnings growth associated with the restart of the Mackenzie sawmill and a renegotiated residual offtake agreement. As a result of prior asset sales, current FCF and the securing of a revolving credit facility subsequent to quarter end, the company is in a stable financial situation with over $16 mln in proforma liquidity. Net debt stood at $55 mln with the Conifex term loan secured against the power assets and largely non-recourse to the lumber operations. We expect Conifex to benefit from higher than average North American commodity pricing in coming quarters offset by higher forecast BC delivered log costs in the New Year. Conifex BOD approved a NCIB which we expect to be used to return cash to shareholders as operations generate increased FCF. ANALYSIS Conifex reported 3Q20 EBITDA of $6.0 mln (adjusted for $1.6 mln wage subsidy) below consensus of 10 mln – 3Q20 results were driven by stable bioenergy segment performance along with surging lumber prices offset by inefficiencies associated with a ramp up of production at the Mackenzie mill. EBITDA was materially ahead of -$1.1 mln in 2Q20 EBITDA as sawmill operations resumed early in the quarter but lower than our $9 mln forecast largely due to $2.6 mln in lumber futures hedging losses. Production volumes at the Mackenzie mill totaled 48 mln bf, implying a significantly improved operating rate of 80% (vs. 4% in the prior quarter) reflecting the ramp-up and restart of the mill. Revenue from the bioenergy segment of $6.0 mln was up 16% compared to 3Q19 and up 27% q/q. As of quarter end, Conifex has net debt of $54.7 mln, which includes $6.4 mln in unrestricted cash, implying a net debt to capitalization ratio of 32%. Solid commodity/share price performance - After peaking at US$955/mfbm, cash SPF lumber prices have retreated to the US$540 level today. Traders report increasing activity which is typically consistent with a seasonal market bottom as more reasonable pricing coaxes buyers to take positions. CME lumber futures also showed positive momentum with January contracts up 20% over the last week (at ~US$580/mfbm). We highlight that this is dramatically higher than the sub US$300 seasonal troughs we have seen in recent years and represents incredible earnings power not reflected in current valuations. Our 2021 estimates and targets are based on conservative US$430 WSPF lumber pricing. With limited inventory and potential capacity growth in the near term coupled with excellent North American housing fundamentals, see RJ&A Analyst Buck Horne’s fresh take on US housing (Market Monitor: Inventory Down 37%, Double-Digit Price Increases Prevalent). With seasonally stronger demand in the first and fourth quarters of the year, we expect improved bioenergy earnings as electricity consumption picks up. Reflecting very depressed COVID19 valuations, Conifex shares have rallied up 76% from Jul-20 (vs. the TSX +6%) outperforming lumber peers Canfor +40%, Interfor +46% and West Fraser +41% during 2Q20. VALUATION Our $1.75/share target is based on a 5.5x 2021E EV/EBITDA, in line with the building materials peer group.

[ValueCap]

Thanks for this.