Our View: We view the announcement of a C$1 billion substantial issuer bid positively for West Fraser shares, as it illustrates both management's commitment to returning capital to shareholders and the powerful FCF generation of the underlying business. With WFG shares having pulled back ~20% from the peak on falling lumber prices, we think the company has identified an attractive window before prices firm up. OSB prices have been remarkably resilient over the period. Going forward, we expect West Fraser will continue to pull levers to add value for continuing shareholders.
First impression:
West Fraser announced that it will commence a substantial issuer bid ("SIB"), which will allow the company to purchase up to C$1.0 billion of its outstanding common shares – The SIB will proceed via a modified Dutch auction, with a tender range from C$85.00-98.00 (or a 2% discount to a 13% premium vs. the most recent closing price of C$86.83). At the minimum purchase price of C$85.00 per share, the SIB would be for up to ~10% of the total number of outstanding shares, while at the maximum price of C$98.00 it would be for ~8.8% of the outstanding shares. West Fraser has suspended all share repurchases until after expiration of the offer on August 17, 2021.
West Fraser has already been actively repurchasing shares YTD –
According to SEDI filings, West Fraser has repurchased ~4.6 million shares YTD (or ~4% of shares outstanding) for ~$330 million. After a quiet April, repurchases ramped up in May and June with the company repurchasing over $100 million each month. West Fraser has repurchased shares at prices ranging from $62.31-$82.51 (average: $70.69).
The company will still have plenty of liquidity post SIB – We estimate that West Fraser will still have a net cash position of >$3 billion even after accounting for share repurchases and the SIB. This should provide management with flexibility to pursue accretive transactions, invest in the business, and continue returning capital to shareholders. The longer lumber and OSB prices remain at record levels, the longer West Fraser will have the high class problem of having too much cash.
Brookfield filing indicates that the company holds less than 1% of West Fraser shares – According to a 13D filed with the SEC last night, Brookfield Asset Management owns 0.9% of West Fraser common shares after selling ~1.175 million common shares on the TSX between May 22 and June 24, 2021. Investors have been highly focused on selling pressure from the formerly large shareholder.
Other lumber companies actively repurchasing shares: WEF, CFF, CFP –
During Q2, Western Forest Products repurchased ~14.6 million shares (or ~4% of shares outstanding) at an average price of ~C$2.07 for ~C$30.5 million. During Q2, Conifex Timber repurchased ~1.46 million shares (or ~3% of shares outstanding) at an average price of ~C$2.29 for ~C$3.3 million. Finally, Canfor repurchased 0.3 million shares in June at an average price of C$27.36 for ~C$8.5 million.