West Fraser Timber Co Ltd T.WFG

TD Upgrade

[retiredcf]

I wasn't expecting an upgrade so presumably they liked the results better once they digested the details. GLTA

West Fraser Timber Co. Ltd.

(WFG-N, WFG-T) US$86.48 | C$104.96

Q1 Affected by Inventory Reval; We Expect Accelerating Recovery Event

West Fraser reported Q1/21 results after the market closed on May 6. These results included contributions from Norbord starting February 1. Aggregate adjusted EBITDA of $1.001 billion was a little below our estimate of $1.121 billion and the consensus forecast of $1.123 billion. The reported figure included US$94 million of non-cash expense related to inventory purchase price accounting for the Norbord transaction. This was not included in our estimate and was likely excluded from the consensus forecast. Adjusted for this item, operating EBITDA was near estimates.

Impact: NEUTRAL

• With the acquisition of Norbord closing mid-quarter, there were many moving pieces in a busy report. Adjusted for the inventory valuation expense, aggregate operating results were close to our forecast even as the composition varied. Better-than-expected lumber EBITDA was offset by below-expected contributions from the remaining divisions. Despite the headline Q1/21 miss, we are increasing our annual 2021 and 2022 earnings estimates to reflect more favourable price spread, volume, and unit costs assumptions.

• Management pledged a "patient, thoughtful, balanced" approach to capital allocation. The company closed Q1/21 with available liquidity of $2.551 billion. Even after planned debt repayments of $665 million over the next two quarters, West Fraser's already-strong balance sheet is expected to improve rapidly over the mid-term. West Fraser was active on its share buyback program during Q1 and has stayed busy on this front during Q2. We expect more aggressive capex the next two years, coupled with ongoing returns of capital to shareholders.

• We are increasing our 12-month target price to US$113.00/share from US$105.00/ share. The revision reflects higher free cash flow forecasts through 2022. Adjusted for free cash flow estimates, we estimate a trend EV/EBITDA multiple of 4.6x, near the company's peer-group average. We argue for a premium.

  TD Investment Conclusion

  The acquisition of Norbord is a major initiative for West Fraser that significantly increases the company's scale and product breadth. We expect West Fraser to remain aggressive in pursuing asset-base growth while returning surplus capital to shareholders. In our view, West Fraser is attractively valued, especially given our forecast of above-trend mid-term free cash flow.

[Nystrom]

Q1 was hard to analyze with a massive merger. One time costs, not having Nobord's Jan results in the numbers, winter storm delays etc made it very hard to put out an accurate estimate.  Whats interesting is yahoo fiance had $7.15 EPS as estimate for Q1 and results came in at $8.90 even with all the moving parts from Q1.  For Q2 yahoo finance has estimates at $7.67 lol. I hope that

[Frost19]

Someone from yahoo finance must have read your post yesterday.  They just revised Q2 earnings estimate from 7.67 to 8.86.  I wonder how long it will take to get revised up again. 

[sunshine7]

Ya. Pretty conservative considering all the factors that indicate increased earnings in Q2. My real concern is the decreasing later targets that indicate EPS as low as $2 in 1Q22. Likely scaring off long term investors.

[sunshine7]

Consider avg lumber price up 50% this quarter over last, Norbord results in 1Q results only 2/3 of full quarter, inventory shipments held back last Q due to weather and rail capacity, and increased procuction since then, I cannot see where they get their forecasts for no increase in earnings. Non-sensence!

[sunshine7]

Sorry, forgot to add substantial buy backs to the list...

[Frost19]

Yahoo finance revised Q2 estimates up again, to 9.40 now. Q2 estimates have gone from 7.67 to 8.86 to 9.40 in the last week or so.  Still far below what will be be actual results but they have lots of time to keep revising it up over the next couple months to get to a more realistc estimate. 

[Frost19]

Q2 earnings projection revised up again...Almost everyday it's been climbing. 7.67 to 8.87 to 9.40 and now 10.56 Still too low but a few more revisions will get it closer lol

[sunshine7]

Yes, surprise to the upside. Here's my take... Lower lumber prices have kicked in likely due to supply constraints easing. Priicing is still well above 1Q pricing. We all know that demand is not easing and producers have increased supply. Therefore I surmize that any drop in margins will be made up by increased sales.  Add to that a full quarter contribution from OSB business and share

[Frost19]

Q2 2021 earnings projections revised up again... 7.67 to 8.87 to 9.40 to 10.56 now 11.24  Keep in mind Q2 2020 earnings were 1.13... 

[Frost19]

Q2 2021 earnings projections revised up again.... Start of May - 7.67 to 8.87 to 9.40 to 10.56 to 11.24 now to 12.26 Q2 2020 earnings were 1.13...

[lifeisgood1010]

Hi Frosty, don't want to dispute your numbers since we may have differente sources. On Yahoo,they are up too but not to the extent that you posted.Unless it's the US-CAD currency converter? In any event Q2 will be a monster quarter EPS Trend Current Qtr. (Jun 2021) Next Qtr. (Sep 2021) Current Year 

[Frost19]

Hey Life,  It's the currency covertion. WFG reported Q1 in USD and yahoo fiance changed projections to USD a couple weeks ago.  So current 10.16 projection is USD (I think the last 3 changes were USD - I noticed because one day it was lower but then I saw the currency at bottom changed from CAD to USD). The BNN guest analyst in April was saying WFG was producing $5/share per month

[lifeisgood1010]

Thanks for the clarification As for your question, it's a matter of supply and demand. Have a nice weekend

[Frost19]

I mean like how does it work when a company is priced at $100 and lets say has 100m shares outstanding, 10b market cap. For easy numbers lets say the company re-purchases 1m shares over a 1 month period and then at the end of the month deletes the shares.  The next business day does the share price open at $101 to keep the same 10b market cap with 99m shares?  I assume this is how it

[lifeisgood1010]

Like you said,market cap is number of shares x market price. Market price of the stock will go where the sum of investors feels what the company is worth based on futur discounted earnings witch are fonction of many variables. One of these important variables is interest rates. The lower the interest rate the higher price of stocks are. Like Warren Buffet likes to say.Tell me that interest

[Jasonuw]

I'll chime in here. WFG bought ~700K shares this week. They have accumulated 1.3 million shares that are set to be cancelled. As a result of the cancellation, it does not impact the share price directly. Instead, when WFG bought these shares, there was upward buying pressure on the stock. When WFG cancels these shares, it does not cause the remainder of shares to ratchet up to compensate and

[Frost19]

Hi Jason,  Ok thanks, makes sense, I appreciate the feedback.

[Frost19]

Been awhile since I've updated but noticed that yahoo finance Q2 earnings projection revised up again. Q2 EPS estimate now at $10.61 USD... not bad for a ~$70 USD share price.  Last year Q2 EPS was $0.83 cents.