Interfor Corp T.IFP

TD

[retiredcf]

As can be seen, their lowered price target simply reflects the payout of the special dividend. GLTA

Interfor Corp.

(IFP-T) C$31.35

IFP Agrees to Acquire Significant U.S. Sawmill Portfolio Event

Last evening, Interfor announced an agreement to acquire a portfolio of U.S. sawmills from Georgia-Pacific (a private company). Interfor will acquire four sawmills with annual capacity of 720 million board feet for a total consideration of US$375 million. The acquisition is scheduled to close in Q3/21 and will grow Interfor's annual lumber capacity by 23% to almost 3.9 billion board feet. On a pro forma basis, the U.S. will comprise 77% of the company's capacity.

Impact: NEUTRAL

• We believe that Interfor is paying fair value, but acknowledge challenging optics around peak-of-cycle timing in a competitive process. The implied capacity multiple of US$521/Mfbm is a 19% premium to U.S. sawmill precedent transaction over the past decade. We estimate a trend EV/EBITDA consideration of 6.8x, also a premium to our estimate of ~6.0x average for sawmill precedents.

• Notwithstanding our perception of valuation, we expect that this transaction will be accretive to mid-cycle EPS and FCF/share. We forecast 19% accretion to our trend EPS estimate and 12% accretion to our trend FCF/share forecast. These estimates are partly tied to Interfor funding the acquisition via available cash.

• In our view, this transaction does not compromise Interfor's strong balance sheet. Adjusted for the acquisition and the pending special dividend of $2.00/ share, Interfor's pro forma net debt-to-cap ratio increases to 22%. With ongoing exceptional lumber markets, even as prices pullback from records, we expect that the company will transition back to net cash in the near term.

• Our lower target price adjusts for the pending special dividend of $2.00/ share. Expected mid-cycle FCF/share accretion tied to the acquisition is offset by a slightly more conservative target multiple as lumber prices start moderating.

  TD Investment Conclusion

  This is a material, if not transformative, acquisition for Interfor. The transaction consideration equals 25% of the company's current EV. Although we do not believe that current lumber prices are sustainable, this cycle is exceptional in terms of both magnitude and duration. Adjusted for mid-term FCF forecasts, we believe that IFP shares are still trading at an excessive discount relative to both the company's peers and historical trading ranges.

[Rational43]

"The implied capacity multiple of US$521/Mfbm is a 19% premium to U.S. sawmill precedent transaction over the past decade" They paid only 19% more than the average transaction over the past decade...when the futures strip is over 100% more, and most analysts expect the longer term price to be 25 - 40% higher than the past decade.   That's a good buy and taking full