West Fraser Timber Co Ltd WFG

TD

[retiredcf]

Have a US$110.00 target. GLTA

West Fraser Timber Co. Ltd.

(WFG-N, WFG-T) US$72.05 | C$98.31

WFG Agrees to Alberta Add-on Lumber Acquisition Event

Yesterday evening, after market close, West Fraser announced an agreement to acquire Spray Lake Sawmills — a private operator of a single sawmill in Cochrane, Alberta (annual lumber capacity of 155 million board feet, skewing towards treated products directed towards domestic buyers) with associated annual cutting rights of ~500,000 m3. The acquisition is expected to close before year-end at a price of C $140 million.

Impact: SLIGHTLY POSITIVE

 This is a relatively small-scale initiative for West Fraser, but is consistent with strategic priorities. The transaction adds 2% to West Fraser's nameplate lumber capacity, while the acquired cutting rights equate to 4% of the company's annual Canadian softwood timber consumption. On a pro forma basis, Alberta will comprise 26% of West Fraser's lumber capacity base versus the current 24%. Along with the U.S. South, Alberta is a preferred growth market for management, given a strong fibre resource and transparent provincial stumpage system. We believe that expansion initiatives in Europe are a potential mid-term focus.

 Broad valuation parameters appear reasonable. Given that the target business skews towards higher-value treated products, capacity multiples are not necessarily the most appropriate metric, but the implied lumber capacity multiple of US$655/Mfbm is an estimated ~30% discount to greenfield replacement cost. We believe that West Fraser also covets the large timber allocation tied to the sawmill.

• The acquisition will be funded from West Fraser's flexible balance sheet. The consideration represents 5% of the company's available liquidity at the end of Q2/23. West Fraser retains a significant net cash balance (pro forma = $4.69/ share or 7% of the current share price).

• Lumber markets are searching for catalysts. The Western SPF 2x4 benchmark cash price ended last week at US$420/Mfbm — up <1% w/w, but down 7% versus the most recent high in mid-July. The Southern Yellow Pine composite price increased 2% w/w, driven by strength for 2x4 dimensions (up 5-8% w/ w). Affordability headwinds have undermined demand from both the renovation and new home construction end-markets. We expect that further permanent/ indefinite capacity closures in B.C. (the high-cost production region, even after recent stumpage cost relief) are inevitable.