Post by
Apaulson on May 01, 2023 7:39am
CIBC Analysis
CFX:
Outperformer CFX-TSX, Sector: Materials
Current Price (4/28/23): C$1.98
Price Target (12-18 mos.): C$3.50
CANFOR PULP PRODUCTS INC. At Least One Mill Will Survive; Upgrading To Outperformer
Our Conclusion
We are upgrading Canfor Pulp to Outperformer (from Neutral) and reiterating our $3.50/share price target. With Canfor Pulp recently falling below $2/share for the first time since May 2009, we believe current levels represent an attractive entry point. At the same time, the depressed share price increases the likelihood that Canfor (which owns 54.8% of CFX) may look to acquire the whole business.
Key Points
Record Low Valuation: Based on its Q4/22 balance sheet (net debt of $53MM), Canfor Pulp’s current share price (sub-$2/share) implies an enterprise value of only $182MM (vs. peak of $1.65 billion in August 2018). While CFX traded as low as $1.33/share on March 11, 2009, the trough enterprise value back then was ~$1.10/share higher at ~$255MM. Although softwood pulp prices have fallen sharply in recent months, current levels (~US$700/tonne) are 46% higher than where NBSK prices stood in March 2009 (US$480/tonne) [~US$660/tonne in 2022 dollars].
Trading At A Steep Discount To Peers: On an EV/EBITDA basis, Canfor Pulp trades at only 2.0x mid-cycle EBITDA (2.9x 2024E), a large discount to Mercer at 3.7x mid-cycle EBITDA (4.4x 2024E). On a capacity basis, we estimate CFX is trading at only ~US$150/tonne (excluding Taylor BCTMP capacity), an ~80% discount to the two most recent industry comps for Canadian softwood pulp capacity. Earlier this year, Domtar announced the sale of its Dryden, ON NBSK mill to First Quality for ~US$735/tonne, right in line with the capacity valuation attributed to Domtar’s sale last year of its Kamloops, BC NBSK mill to Kruger. Even if you take a conservative view on fiber availability in the BC Interior, and assume Canfor Pulp’s Intercontinental mill has to eventually shutter (effectively assuming the only value in CFX is the 600K mtpy Northwood mill), that would imply the market is valuing a one-mill Canfor Pulp at only ~US$225/tonne, still ~70% lower than the recent two Canadian comps. We expect an additional market comp to emerge shortly as Pulp & Paper Week reported this weekend that Resolute FP’s sale process for its Thunder Bay, ON pulp/paper mill complex (390K mtpy of market pulp and 230K mtpy of newsprint) may be concluded in mid-May.
Pulp Price Declines May Stabilize By June: While Canadian NBSK prices in China have fallen ~US$200/tonne over the last two months in China to ~US$700/tonne, we are seeing signs that further downside risk to pricing may be limited to ~US$50/tonne given supply curtailments.