TSX:WFG - Post Discussion
Post by
retiredcf on Oct 29, 2021 8:52am
RBC
Outperform
NYSE: WFG; USD 82.72; TSX: WFG
Price Target USD 125.00
West Fraser Timber Co. Ltd.
Favorable setup heading into 2022; reiterate Outperform
Our view: West Fraser reported Q321 results that were in line with our forecast and above consensus expectations. Even though lumber & OSB prices have corrected lower from record levels earlier this year, we believe West Fraser's cash generation capabilities remain unmatched and underappreciated by the market. We expect that the company will continue to aggressively repurchase shares, make bolt-on acquisitions, and invest in the existing asset base. Given our positive near-term outlook, we expect West Fraser will continue to create shareholder value. Therefore, we are reiterating our Outperform rating.
Key points:
Reiterating our $125 price target and Outperform rating – Our price target is based on a blended ~6.75x multiple on our Trend EBITDA of $1,525MM (85% weighting) and our 2022E EBITDA of $3,128MM (15%).
South Fraser Timber? Focus continues to be on growth in the US South – The company continues to deploy growth capital in the US South, announcing two bolt-on acquisitions in October alone. Firstly, West Fraser acquired Angelina Forest Products, the owner of a shiny new Texas sawmill favorably positioned relative to its Nacodoches OSB mill. While "expensive" based on per board foot metrics, West Fraser appears confident and would likely do it again if given the chance. Secondly, West Fraser announced the acquisition of Georgia-Pacific's idled Allendale OSB mill, which we expect will re-start in Q3/22. We view both transactions as opportunistic as noted by CEO Ferris on the company's Q3 conference call.
The Norbord acquisition keeps looking better and better – Although lumber has been very good, we think the OSB business has been the clear star of the company. For investors, we view OSB as a superior business to lumber given that: 1) production is far more consolidated; 2) there are limited threats from offshore imports; and, 3) the business still has runway to take market share from alternative products such as plywood. If West Fraser can prove out the case for synergies between lumber/OSB production, we think the company will have an advantage in the ongoing consolidation of North American lumber production.
What went wrong in lumber? – A big surprise during the quarter was the significant q/q decline in lumber EBITDA. While expected given the decline in pricing, we think West Fraser was particularly impacted by several one- time items that are likely to unwind going forward. Firstly, West Fraser was negatively impacted by the fire season given that fires were active near its operations. Secondly, West Fraser's greater exposure to Alberta resulted in elevated stumpage costs (which closely follow lumber prices) flowing through results during the quarter. These have already normalized with lower lumber pricing. BC stumpage rates will remain elevated until January 2022. Finally, log deck fire negatively impacted results and operations at the Chetwynd sawmill.
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