Interfor Corp T.IFP

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[retiredcf]

Bump their target by 3 bucks to $43.00. GLTA

North American Paper & Forest Products: Q2/22 Preview

Expect Moderating Wood Product Margins Before Steeper Q3 Decline Lumber and OSB Commodity Price Round Trip Complete

Q2/22 earnings season for our forest products coverage universe starts later this week. Our estimates are generally in line with consensus forecasts this quarter (a rarity). Notwithstanding capitulating lumber and panel prices, we forecast above- trend results for seven of 10 names in our coverage universe, as price-realization timing lags soften the landing. Our Q2/22 estimates are below consensus for six of 10 equities, but variances are generally immaterial. We highlight IFP as a small earnings upside surprise candidate this earnings season.

Expected prominent themes in Q2/22 earnings reports: 1) weaker, but still well above-trend, wood product price realizations; 2) progress towards lowering inflated end product inventories in western Canada (partly via production downtime); 3) strong pulp & paper pricing momentum; and 4) broad cost inflation (e.g., freight, fibre, chemicals, and labour). We believe that most investor attention will shift towards the potential for accelerating earnings pressure during Q3/22, as the full impact of the wood products price collapse flows through to price realizations. Following an extended period of aggressive capital deployment - including share buybacks - we expect that management teams will temper expectations for incremental returns of capital to shareholders, given moderating FCF yields.

Earnings forecast revisions are minor. We previously adjusted our outlook on June 23. We are raising target prices for three companies: CFP, IFP, and LPX. We believe that the consolidation theme will continue to buoy sector sentiment and are comfortable expanding valuation parameters for these names. Given the recent share price volatility, we acknowledge that the returns to targets for some names are relatively high; we will reassess our ratings/targets in the coming weeks.

We reiterate our sector OVERWEIGHT bias. Canadian forest product equities have rebounded in recent weeks, as the Paper Excellence bid for RFP and press speculation that Kronospan/CVC Capital will make a privatization offer for WFG have lifted sector valuations - especially for lumber and panel producers. Despite recent gains and an expectation of ongoing commodity market volatility this year (a factor that we believe alienates a contingent of potential investors), valuations based on mid-cycle estimates remain below long-term averages. Our coverage universe is trading at 4.0x estimated trend EV/EBITDA, adjusted for FCF forecasts through 2023 vs. the long-term average of 5.3x. Our top picks are IFP and LPX.