TSX:WFG - Post Discussion
Post by
retiredcf on Dec 28, 2022 10:22am
TD
December 21, 2022
Our High Conviction Buy
West Fraser Timber Co. Ltd. WFG-N,T: US$73.79; BUY 12-Month Target: US$100.00
We highlight West Fraser as our top pick in the sector based on the company's strong position to pursue growth. We forecast below-trend earnings for West Fraser over the next two years but expect that the company's robust balance sheet will support ongoing value-accretive growth initiatives (organic and M&A).
West Fraser ended Q3/22 with net cash of $824 million and available liquidity of $2.375 billion. We forecast a 33% y/y increase in capex in 2023 to US$600 million, reflecting the US$255 million rebuild of the Henderson, Texas lumber facility (construction scheduled to start in Q4/22).
Valuation remains attractive in our view. Adjusted for FCF assumptions through the end of 2024, we estimate that West Fraser currently trades at 3.3x trend (mid- cycle) EV/EBITDA — a pronounced discount to the long term average of 6.0x. In our view, the discount to historical trading ranges is excessive and represents attractive value, especially in the context of a potential Kronospan bid. Our forecasted FCF yields of 4% in 2023 and 8% in 2024 are muted, but, absent external growth initiatives, we still expect West Fraser to end with a net cash position by the end of 2024.
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