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North American Paper & Forest Products: Q1/21 Preview
Another Round of Wood Product Commodity Price Forecast Hikes Expect Record Q1 for Lumber/OSB Equities; Q2 Should be Better
After positive revisions to our commodity deck a month ago, our estimates are already due for an overhaul as wood product prices climb into the ether. Current benchmark lumber and OSB prices are more than double precedent 2018 peaks. Our mid-term view is unchanged; we do not consider current wood product prices sustainable, but the extended mid-term free cash flow window is unprecedented in terms of magnitude and duration.
We are increasing our average 2021 price estimates for lumber and structural panels significantly. Our average 2021 Western SPF lumber and North Central OSB price forecasts increase 30% (to US$921/Mfbm) and 23% (to US$763/Msf), respectively. We are also increasing our average 2021 NBSK pulp list price estimates by 5-7% for North America and Europe. As a result of the changes to our commodity price deck, mitigated by revised currency and cost assumptions, our EBITDA forecasts increase 17% for 2021 and 10% for 2022, on average.
We are increasing our target prices for nine of 11 equities in our coverage universe. Adjustments reflect increases in free cash flow estimates through 2022. In some cases, we have also increased adjusted trend EV/EBITDA target multiples to reflect a lower risk profile going forward. Following recent share- price strength, we are downgrading Mercer International to HOLD from Buy.
Our Q1/21 estimates are generally close to consensus; the latter has increased in recent weeks to compensate for commodity market strength. For most lumber and panel producers, we forecast record quarterly earnings. Q2/21 prospects are even stronger, given sustained commodity-price momentum.
We reiterate our OVERWEIGHT sector bias. For lumber and panel producers, we forecast average FCF yields of 26% in 2021 and 12% in 2022. These yields are based on current share prices, which have increased, on average, 318% from the March 2020 trough levels. Adjusting for free cash flow estimates through 2022, the average trend EV/EBITDA valuation for lumber producers in our coverage universe is 4.1x, still below the long-term average of 6.2x. Our top picks remain West Fraser and Interfor.
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