TSX:WFG - Post Discussion
Post by
retiredcf on Jan 28, 2022 7:49am
TD Notes
North American Paper & Forest Products: Q4/21 Preview
Expected Recurring Theme: Cost and Volume Headwinds Recent Wood Product Commodity Momentum More Evident in H1/22
Q4/21 earnings season for our forest products coverage universe starts on February 3 and concludes on March 10. We expect mixed results relative to consensus forecasts and prior-period earnings. Our Q4/21 estimates are notably above consensus for five of the 10 equities, with MERC standing out as an upside outlier. We expect negative q/q earnings trends for eight of the 10 names in our coverage, mostly reflecting volume constraints and cost pressure (IFP and RFP are expected to be positive q/q outliers). We still expect that Q4/21 adjusted EBITDA will represent above-trend results for six of the 10 names in our coverage universe.
Expected prominent themes in Q4/21 earnings reports: Volume constraints (shipping hurdles and downtime); lumber price realization timing lags; and general cost inflation. We expect that volume pressure will be most evident for western Canadian operations as November B.C. floods exacerbated logistics bottlenecks already in place for pulp and wood products. Downtime is normally more expensive than the opportunity cost of missed shipments at compelling margins; unit costs will also increase as fixed costs are allocated across a smaller volume base.
Earnings forecast revisions are minor. We raised our 2022 estimates in early- January, primarily reflecting surging wood product prices to start the year. The only notable revision to our outlook in this note is for RFP; we have lowered our EBITDA and adjusted EPS forecasts to include lumber duties on shipments to the U.S. from Canada. This is a reclassification to harmonize our RFP forecasts with the company's peers and in advance of an expected change in the company's reporting approach in tandem with the Q4/21 earnings release. We are not changing any target prices. Given sharp share-price declines in the past two weeks, we acknowledge that the returns to targets for a couple of names under coverage are relatively high; we will reassess our ratings/targets in the coming weeks.
We reiterate our sector OVERWEIGHT bias. Notwithstanding strong equity gains in 2021 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. We highlight IFP as our top pick in the sector, based on value-accretive growth initiatives and balanced capital-allocation priorities.
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