Key points:
Increasing our price target +$10 to $47 (from $37) and reiterating our Outperform rating – Our target is based on a 7.0x EV/EBITDA multiple on our trend EBITDA estimate of $275MM (85%) and our 2021E EBITDA of $1,241MM (15%).
Higher for longer, but not $1,000+ for longer – We expect that lumber prices will remain strong and above historical levels due the large structural supply-demand imbalance caused by a lack of available fiber in BC, but we think that it will take ~2-3 years for new capacity to meet demand. Eventually, current pricing is likely to cause some demand destruction, but so far builders and remodelers have been willing to pay given that home prices have appreciated more than lumber has.
The Random Lengths Composite was up another $124 w/w to a record $1,414 – At current pricing, we estimate that Interfor would make >$4 billion of EBITDA and ~$3 billion of FCF on an annual basis. While we believe this is temporary, we think Interfor could make ~$75MM of EBITDA per week or ~$55MM of FCF (or ~$0.80/share) per week while it lasts.
There's no need to underwrite long-term $1,000 lumber to make the stock work at current levels – If we fast-forward to the end of the year and value Interfor on our more normal (but still strong) 2022 forecast and take the multiple down half a turn to 6.5x, our valuation is still ~13% higher than our 1-year target price of $47. To even leave the stock flat from today's price, the multiple would have to come down to ~4.0x (which Interfor has only traded at on a Trend basis in dire market conditions). Underlying that forward valuation we forecast Interfor to have ~$12/share in cash (assuming no buybacks) plus an improved asset base following a heavier capex year.
Lessons learned? Investors and producers seem to be hunkered down for the eventual fall in prices – Not only has the 2018 experience caused producers to take a more cautious approach, it seems that investors are also preparing for the eventual fall in pricing. But since it is common knowledge that when lumber prices fall that the stocks go down too, we think that is likely already priced in. While we think there could be some weakness once prices correct, we suggest that it could be a buying opportunity given that the stocks have lagged commodity prices since last summer.