Interfor Corp T.IFP

TD Notes

[retiredcf]

Their target for IFP is $50.00. GLTA

North American Paper & Forest Products

Valuation Correction Opens Opportunity in Wood-weighted Equities Lumber Price Declines are No Surprise; Estimates Still Rising

Forest product equities have tumbled over the past three months. The average share-price correction for lumber and panel-weighted equities in our coverage universe from mid-January highs is 26% — a negative comparison versus a gain of 2% for the S&P/TSX Composite and a 5% pullback for the S&P 500 over the same duration. It is normal for investors to react negatively to inflection points for commodity markets (lumber and OSB prices have started to retreat from exceptional peaks), but we highlight two factors: 1) the lumber/OSB price pullback from near- record levels was already reflected in consensus estimates and 2) we still expect ongoing exceptional mid-term results for most names.

We are raising our price forecasts for most forest product commodities, led by lumber, OSB, and pulp. The strong run for wood product prices into Q1/22 exceeded expectation and requires revisions to our outlook. We are raising our average 2022 Western SPF lumber price forecast by 15% to US$834/Mfbm and our average 2023 price estimate by 8% to US$540/Mfbm. The positive impact associated with commodity deck adjustments is muted by more conservative cost estimates and lower volume assumptions. The net impact is an average 16% increase in our 2022 adjusted EBITDA forecasts and an average 10% increase in our 2023 estimates.

In our view, the recent valuation contraction for the sector is excessive. We attribute lower trading multiples to a combination of: 1) investors' belief that the demand correction for wood products will be worse than expected and 2) perceived risk associated with accelerating peak-to-trough sector earnings volatility. Lumber- weighted equities are trading at an average trailing P/BV multiple of 0.9x (0.6x based on expected 2023 BV). Historically, the sector has traded below book value only during periods of balance-sheet risk. Most lumber producers exited 2021 with net cash.

We reiterate our sector OVERWEIGHT bias. Wood product commodity price sentiment has rolled over and we cannot rule out further short-term share-price weakness until markets start to normalize, but we see a compelling opportunity for investors with anything beyond a three-month horizon. Lumber-weighted equities in our coverage universe are trading at 2.4x estimated trend EV/EBITDA, adjusted for FCF forecasts through 2023, versus a long-term average of 5.5x. We have upgraded West Fraser to ACTION LIST BUY from Buy and highlight this name as our top pick in the sector. We have also upgraded our Louisiana-Pacific rating to BUY from Hold.

[SleepingGiant64]

Bullish note despite the price trim. They have 2022 EPS up to $13.86 from $11.46. And EBITDA at $1271 from $1086. FCF at $11.00 this year (34% of market cap, falling to just 17% next year at $540 lumber).

[dosperros]

An issue I'd note is they value it at a "trend" EBITDA which I believe to be lower than the cash breakeven point of many BC operators.  Unlike the bad old days, they won't run at a loss.  I suspect, like Corton Capital et al, that the go-forward pricing equlibrium is more like $700 to $900... not $540 like TD. They do enjoy their reversion to the mean thesis though