Norbord Inc. T.OSB

CIBC

[retiredcf]

Norbord Inc.

Moving From Top Pick To The Sidelines After Recent OSB Rally

Our Conclusion

We are downgrading Norbord to Neutral (from Outperformer) following recent share price appreciation. Our C$53 price target and estimates remain unchanged. While NA OSB prices have likely peaked this cycle, we see earnings only peaking in 2020 when the company should still benefit from robust pricing levels while seeing full contributions from the Inverness expansion and Huguley mill re-start, as well as the likely re-start that year of Chambord.

Implications

Reducing Our Recommendation On OSB After Having Been Outperformer For The Last 3.5 Months: We had previously upgraded Norbord to top pick on June 5, 2017 when the shares were trading at C$38.82 due to an improved supply/demand outlook for North American Oriented strand board (OSB). With Norbord now approaching our C$53 price target, we see limited catalysts and, effective September 24, reduce our rating to Neutral.

OSB Prices And Equities Have Surged Following Hurricanes Harvey And Irma: Random Lengths reported North Central OSB prices moved up another $10/msf W/W to $445 on Friday as lean field inventories and extended order files encouraged producers to push pricing higher. We note that OSB markets can turn quickly and we expect prices to start to moderate by late October. We assume NA OSB prices next year will average 29%-33% lower than current levels. We expect North Central benchmark OSB prices to average $305/msf in 2018 and $310 in 2019.

Capacity Additions Around The Corner: Over the next eight months, we expect significant additional capacity from the start-up of five mills representing over 10% of current operating capacity. While we believe this capacity is all needed to meet projected demand growth, it represents downside risk to pricing forecasts in the event U.S. housing starts stall out at 1.2MM into 2018.

Join Us On Friday, September 29 at 10:30 a.m. ET: We will be hosting a conference call with FEA's OSB and lumber experts. 

[dosperros]

RetiredDCF, you are the man. this is excellent.  Thank you for sharing. I view CIBC as the least bullish of RBC, RJ, and TD.   I disagree w.r.t. capacity adds being a headwind.  I think the maket can absorb this, unlike 2013.  Plus, a big one is Norbord Alabama, so that will fall into supplier discipline. Pricing evidence tends to peak 1-3 years after a disaster.  Not