Post by
retiredcf on Jul 29, 2022 9:42am
CIBC Raise Target by $32.00
EQUITY RESEARCH
July 29, 2022 Earnings Update
WEST FRASER TIMBER CO. LTD.
M&A Potential Outweighs Oversupply Risks For OSB
Our Conclusion
Reiterating our Outperformer rating on West Fraser and increasing our price
target to C$156 (from C$124) on higher valuation parameters. Our revised
SOTP valuation equates to a mid-cycle multiple of 6.1x, slightly higher than
the company’s long-term average (~6.0x). While Street estimates for 2023
look optimistic (particularly on the OSB side), valuation remains compelling.
As the largest (and one of the lowest-cost) lumber and OSB producers, WFG
is well-positioned to navigate volatile wood markets. The company’s strong
balance sheet should support sustained large share repurchase activity
(even as commodity prices moderate), and provide the company flexibility to
consider additional growth opportunities.
We also see potential M&A optionality in the name given the reported interest
from major strategic holder, Kronospan. Our revised upside scenario
(C$188/share) equates to the full replacement upside value we have
previously indicated as the likely high-end of the range of a potential
takeout valuation.
Key Points
Reducing 2022/23 EBITDA Estimates By 4%/1%: We have moderated our
Q3 and Q4 estimates by 7% and 6%, respectively, largely reflecting WFG’s
lower volume guidance for SPF lumber and NA/European OSB. Our 2023
EBITDA estimate of $1.5 billion is largely unchanged. We continue to believe
consensus estimates for next year are overly optimistic (particularly on the
OSB side), with consensus forecasting SPF lumber at ~$540/mfbm in 2023
(CIBCe $500) and OSB North Central at ~$400/msf (CIBCe $315). Our
consolidated EBITDA estimate for WFG next year is 18% below consensus
as we expect OSB prices to deflate dramatically given significant capacity
additions (~3.5 Bsf over 2023/24) at a time of rapid deceleration in new home
construction (~55% of OSB demand) with the steep deterioration in
affordability.
Over the past two weeks, several major U.S. homebuilders have reported
orders declining 10%-25% in Q2 (with a sharper drop-off in June), and
cancellations often doubling compared to a year ago as consumer
confidence fades further. With builder confidence declining for the past seven
months in a row (to their lowest levels since May 2020), we expect new
residential construction to slow materially, with our forecast projecting starts
of 1.45MM in both 2023 and 2024 (14% lower than the H1 average of
1.69MM).
Waiting On Kronospan’s Next Move? While we have no insights into
whether the Ketcham Family would entertain an offer, we are now less
certain that the family’s control of the Class B shares necessarily implies a
veto on a potential deal (as suggested in the AIF). We could not locate
supporting language in the disclosed articles of incorporation/amendments.