TSX:GFP - Post Discussion
Post by
retiredcf on Mar 29, 2022 9:06am
RBC Initiate Coverage
Their upside scenario target is $3.50. GLTA
GreenFirst Forest Products Inc.
GreenFirst, and we are not just talking about money; initiating coverage at Outperform
Our view: Having completed the acquisition of the Rayonier Advanced Materials sawmill and newsprint assets in Eastern Canada, GreenFirst Forest Products ("GreenFirst") will look to optimize its assets, reduce cash production costs, and increase production. Given several low-cost potential optimization initiatives, we think that GreenFirst is well positioned to create shareholder value over the coming years. Record lumber pricing doesn't hurt either. Therefore, we are initiating coverage with an Outperform rating and a $3.00 price target.
Key points:
Initiating at Outperform with a $3.00 price target – Our price target of $3.00, which supports our Outperform rating, reflects a blended target multiple of 6.0x on our Trend EBITDA of $100 million (weighted 85%) and our 2022 EBITDA estimate of $135 million (weighted 15%).
Buying sawmills from pulp & paper producers has historically been a good strategy – Having completed the acquisition of the Rayonier Advanced Materials sawmill and newsprint assets (which were also formerly owned by Tembec) on August 30, 2021, GreenFirst has initiated a strategy of driving operational improvements with a primary focus on the sawmill assets (rather than capital intensive pulp & paper operations). We think that buying sawmill assets that are non-core to pulp & paper producers is an effective strategy since these producers generally under-invest in sawmill activities given that: 1) pulp & paper assets require significant capital investment; 2) sawmills generally account for a smaller percentage of total profitability; and, 3) management generally views sawmills as a provider of cost-effective wood chip supply rather than a profit centre.
Management has a track-record of executing a similar strategy – The company is led by CEO Rick Doman, who executed a similar strategy with EACOM Timber Corporation, which acquired sawmill assets from Domtar Corporation and later sold to private equity. We think that GreenFirst could follow a similar path, with management implementing operational improvements before potentially selling the company to a larger sawmiller such as Resolute Forest Products or Interfor at a premium.
Extremely strong lumber market conditions should result in strong FCF generation – Although we expect that pricing will level off as logistics constraints in Western Canada ease, we expect that pricing will remain structurally above historical levels due to: 1) significantly higher costs in the BC Interior (the marginal producer in North America); 2) inflationary pressure on inputs and labour; and, 3) reduced imports from Europe due to the loss of lumber supply from Russia. Therefore, we expect that lumber prices could stay >$550/mfbm over the next few years.
Valuation is deserved given growth potential – We think GreenFirst's premium to other lumber producers is fair given: 1) the potential to drive operational improvements leading to EBITDA growth; and 2) the company's favourable geographical positioning in Eastern Canada (vs. anything in BC).
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