Interfor Corp T.IFP

TD (on WFG)

[retiredcf]

West Fraser Timber Co. Ltd.

(WFG-N, WFG-T) US$96.20 | C$124.02

Thoughts on Potential Privatization Offer from Kronospan/CVC Event

Yesterday morning, a Reuters article, citing anonymous sources, indicated that a consortium had submitted an expression of interest to acquire West Fraser. Reported interested parties are Kronospan LLC (a private company and the largest wood-based panel manufacturer in the world) and CVC Capital (a private equity investor). Yesterday afternoon, West Fraser issued a brief press release indicating previous discussions with Kronospan (a 9% West Fraser shareholder) and CVC, but noting that West Fraser has not received a proposal and that there are no ongoing discussions between the parties.

Impact: POTENTIALLY POSITIVE

• We do not discount potential interest from Kronospan in acquiring West Fraser. There is a fit as Kronospan's panel portfolio (annual capacity of 21 million m3, mostly based in central/eastern Europe) would complement West Fraser's panel segment (OSB, plywood, and non-structural panels in North America and western Europe). There would presumably be operating and marketing synergies between the two companies. Kronospan initially disclosed an ownership position in West Fraser (via the former's Banasino Investments Ltd. vehicle) this February.

• If a privatization offer is made, we could envision a bid of US$130.00/share. This is based on a 6.5x trend EV/EBITDA multiple (using our view of mid-cycle earnings potential), adjusted for the Q2/22 SIB and expected incremental FCF through the end of the year. This gives no additional contingent value to a prospective softwood lumber duty refund. Our revised US$120.00 target price is a rounded, probability-weighted approach applying a 50% potential of a successful privatization offer and a 50% weighting to our previous status quo target price of US$105.00.

• On balance, we still see compelling share-price upside. Even after yesterday's 16% share-price rally, we still consider West Fraser to be undervalued, especially if a privatization bid emerges, given the company's scale and ROCE track record.

  TD Investment Conclusion

  We remain positive on West Fraser's share-price prospects and await developments towards a potential offer. In the meantime, we expect that West Fraser will retain its balanced capital-allocation approach, including aggressive asset-base investments, while sustaining a flexible balance sheet.