TSX:WFG - Post Discussion
Post by
retiredcf on Oct 27, 2021 8:05am
RBC Analysis
October 26, 2021
West Fraser Timber Co. Ltd.
Acquiring the Allendale OSB mill for $280 million
Outperform
NYSE: WFG; USD 84.99; TSX: WFG
Price Target USD 125.00
Our View: We think West Fraser paid a fair price for Allendale, contingent on the mill running smoothly upon re-start. Returns are likely to be front-loaded as we expect that pricing will remain elevated in 2022 as strong demand will continue to outstrip limited supply. However, that could change in the mid-2020s as another four OSB mills will start-up in 2023/2024. On a normalized basis, we estimate that West Fraser is paying ~5-6x Trend EBITDA. We like that West Fraser continues to balance return of capital to shareholders with investment in the business.
West Fraser has entered into an agreement to acquire Georgia-Pacific's Allendale OSB mill in South Carolina for $280 million – The Allendale facility began producing OSB in 2007 but has been idle since late-2019 when Georgia-Pacific indefinitely curtailed the mill (click here for our note at the time). The Allendale facility now has an estimated capacity of 760 mmsf on a 3/8" basis, 140 mmsf below the facility's previous nameplate capacity of 900 mmsf. The transaction is expected to close following the completion of US regulatory reviews and other customary conditions.
Valuation – The headline valuation of $368/msf is largely in line with recent precedent transactions in the $160-440/msf range (average: $300/msf). Given that West Fraser intends to invest $70 million to upgrade the facility in preparation for the re-start, the "all-in" cost of $461/msf is at the high- end of recent greenfield announcements (range: $333-451/msf); however, West Fraser will benefit from a faster time to start-up (9 months vs. 36-48 months for a greenfield), so we view the premium as fair. At their recent Investor Day, West Fraser management also indicated that the company estimates a Greenfield OSB mill would cost >$500/msf to build with a ~7 year payback period, so Allendale likely offered a better return on capital.
Impact on supply-demand – We had previously expected Georgia-Pacific to re-start Allendale during Q1/22, but West Fraser's timeline suggests first board sometime in Q3/22 (nine months after closing) followed by an 18-24 month ramp-up period. Therefore, we expect that OSB market conditions will remain even tighter through 2022. The re-start of Allendale (+760 mmsf) in Q3/22 will be partially offset by the conversion of LP Sagola to SmartSide (-420 mmsf). In 2023, we still have 1.65 bsf of capacity starting up from Wawa OSB (a Forex-related group), One Sky Forest Products, and RoyOMartin. Huber plans to start-up a ~750 mmsf mill in Cohasset, MN in 2024, but we expect LP will convert its 650 mmsf Maniwaki mill to SmartSide around the same time.
Questions remain – Our primary concerns include the availability of labor and where the $70 million capital investment will be primarily focused. Our industry contacts have previously suggested that the mill may have been used by GP to replace parts at its nearby sister-mill at Clarendon County. West Fraser expects Allendale to be a low-cost mill following the modernization.
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