Interfor Corp.
(IFP-T) C$29.86
Investor Meetings Give Context on Capital Allocation Priorities Event
Last week, we hosted virtual meetings between Interfor management and institutional investors. Discussions covered a wide array of topics: context around the current lumber price correction; mid-term capital-allocation priorities as the company puts its strong balance sheet to work; and more details behind the pending acquisition of four U.S. sawmills from Georgia-Pacific (GP).
Impact: NEUTRAL
Discussions were informative, but give us no cause to change our estimates, target price, or positive investment thesis.
Management likened the current lumber market correction to the pullback from September-November last year. The peak-to-trough correction for the composite lumber price over the past four weeks is 26%, led by seasonal factors and a buildup of inventory at big-box retailers. Management expects that the steep cost curve, generally lean inventories through the supply chain, ongoing robust demand, and constraints on the industry's ability to add mid-term production will support an extended above-trend price cycle.
Interfor has a clear pecking order for capital allocation: 1) accelerating discretionary capex; 2) prospective sawmill acquisitions; and 3) ongoing returns of capital to shareholders. Interfor remains active on its 10% NCIB, which extends through November 10, 2021.
The pending US$375 million acquisition of four U.S. sawmills from GP is significant, adding 23% to Interfor's lumber capacity. Management acknowledged a relatively high capacity multiple for the acquisition (US$521/ Mfbm versus the 10-year U.S. precedent average of US$436/Mfbm), but positioned the assets as relatively high margin. The company has further acquisition aspirations, with a focus on expanding its U.S. lumber footprint.
TD Investment Conclusion
The current lumber price correction aligns with our forecasts. Even with a tempered commodity market, we still believe that Interfor is well-positioned to generate exceptional free cash flow over our forecast horizon. 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.