Interfor Corp T.IFP

TD 2

[retiredcf]

Interfor Corp.

(IFP-T) C$32.73

Capital Deployment Gaining Pace Event

Interfor reported Q1/22 results after market close on May 11. Adjusted EBITDA of $570.1 million was slightly below our estimate of $588.4 million and the consensus forecast of $603.6 million. Adjusted EBITDA included a $68.0 million fair value inventory adjustment related to the acquisition of EACOM Timber. Our estimate included a $70.0 million value adjustment; it is unclear to what extent this factor was embedded in the consensus forecast. Adjusted EPS of $6.61 was below our estimate of $6.94 and the consensus forecast of $6.97.

Impact: NEUTRAL

• Excluding the EACOM fair value adjustment, recurring adjusted EBITDA of $638.1 million was 26% above our estimate of the company's annual mid-cycle (trend) potential. Surging lumber prices more than offset volume constraints and cost inflation. Interfor's lumber price realizations jumped $588/ Mfbm (+72%) q/q; this lagged our forecast but was consistent with the peers' trends.

• EACOM generated material results out of the gate. Excluding the fair value adjustment, EACOM contributed adjusted EBITDA of $73.1 million in less than six weeks of ownership (11% of total Q1 adjusted EBITDA).

• Interfor is deploying capital at a rapid pace. The company repurchased 5.0 million shares (8% of the total at the end of 2021) for $194.3 million in Q1 and completed its 10% NCIB in April. Despite share buybacks, the $731.2 million EACOM acquisition, higher working capital, and a large tax payment, Interfor ended Q1/22 with minimal net debt and abundant available liquidity of $483.3 million. Q1/22 FCF was $3.78/share (11% yield for the quarter).

   We reiterate our BUY recommendation and $50.00 target price. Small revisions to our mid-term free cash flow outlook are not significant enough to warrant a target-price change.

  TD Investment Conclusion

  In our view, Interfor's current valuation represents a compelling entry point for investors with anything beyond a short-term investment horizon. We forecast above- trend lumber prices through the end of 2023. Adjusted for expected FCF through the end of 2023, we estimate that Interfor’s trend EV/EBITDA multiple is 2.8x — a steep discount to the company's historical trading range.