Key points:
Reiterating Outperform Perform rating and $8 price target – Our $8 price target is based on a blended 3.25x multiple on our trend EBITDA of $175MM (85%) and our 2023E EBITDA of $178MM (15%).
Q222 results slightly below our expectations – Canfor Pulp reported Adjusted EBITDA of $15.7MM, below our forecast of $18.4MM and consensus of $16.3MM.
Focused leadership + decent market conditions + inexpensive valuation = a winning combination in this sector – We believe that CEO Kevin Edgson will make a difference, though not because of our high regard for him (we believe that his talents are a great match for the job), but rather because this company lacked a pulp focus. With an enterprise value of $414MM and assigning zero value for the Taylor pulp mill, the current share price effectively values CFX’s NBSK pulp capacity at less than $300/mt. As a point of reference, Kruger Inc. just purchased Domtar’s Kamloops NBSK pulp mill for ~$750/mt. In our view it’s not a stretch to see CFX trading above $10/ share at some point over the next 18 months.
Pulp segment Adjusted EBITDA of $12.2MM below our $15.8MM forecast – Pulp segment gross sales of $235MM were above our $206MM forecast, driven by higher-than-expected pricing and somewhat higher- than-expected volumes. Shipments volumes of 205k mt were above our 200k mt forecast, and sales realizations of $1,148/mt were also above our $1,029/mt forecast. Unfortunately, costs were also up slightly q/q despite the lower maintenance outages in Q2, as the downtime at Taylor for the whole quarter was a significant drag. While we anticipate that pulp pricing has reached its peak this cycle, we do not foresee a rapid decline over the medium term. With this in mind, we anticipate that CFX will generate significant cash flow over the coming quarters, adding cash to an already under-leveraged balance sheet.
Paper segment EBITDA of $6.7MM above our $5.3MM forecast – Paper segment gross sales of $52MM were above our $38MM forecast, driven by higher-than-expected sales realizations and somewhat higher-than- expected volumes. Kraft paper markets continue to benefit from the environmental substitution for plastic and we anticipate no change to this trend.