November 4, 2022
Interfor Corporation No stranger to a slowdown
Our view: Interfor Corporation (“Interfor”) reported Adjusted EBITDA of $103MM (adjusted for a $26MM duty recovery), which was above our $99MM forecast but below consensus at $109MM. We think Interfor's diversified operating platform positions it well for what is shaping up to be a slower year ahead, and reiterate our Outperform rating.
Key points:
Reiterating our $35 price target and Outperform rating – Our price target is based on a 5.0x EV/EBITDA multiple on our trend EBITDA estimate of $525MM (85%) and our 2023E EBITDA of $440MM (15%).
Operating plan remains in flux. While Interfor's current operating plan calls for normal operating schedules to resume in January 2023 following a reduction of 200 mmfbm of capacity in Q4 across its operating regions to balance production and demand, management noted that it will not have a good sense of how Q1 is shaping up until mid-December. Management's preference is to keep supply chains and its workforce in place, but it stated it will take necessary steps to balance supply and demand, and maximize shareholder value. The company also plans to carefully manage its inventory levels, which are in its target range at present. While we expect falling stumpage prices in BC to provide some relief on the cost side (i.e., breakeven pricing in the province should decrease), we wonder if further capacity reductions could be necessary across the industry in the new year.
Exports seem unlikely to save 2023. 2023 looks to be shaping up to be a tough year for North American wood products demand, with a looming recession and housing affordability issues (elevated home prices, material increases in interest rates, etc.), and management noted that it sees few opportunities for increased exports to balance the market. The Japanese market is working through elevated inventory levels, and geopolitical issues are weighing on markets that may have in other circumstances been able to provide some support. On the positive side, management confirmed that it expects home repair and remodel activity to hold up relatively well given strong household balance sheets (i.e., elevated home equity levels).
Repurchases still part of the playbook, but likely less meaningful in the near term. The company has renewed its NCIB, effective November 11, allowing it to repurchase up to ~5.1MM shares over the next year. We expect repurchase activity to be somewhat more modest in the near term with a tick up in leverage (pro-forma the Chaleur transaction, which remains on track to close in Q4; please click here for more information) and a reduced free cash flow outlook after significant return of capital over the last year (Interfor exhausted its previous NCIB, and completed a $100MM SIB in September).