TSX:WFG - Post Discussion
Post by
retiredcf on Sep 20, 2023 9:15am
TD
North American Paper & Forest Products
Waiting on Wood Product Commodity Price Catalysts Valuations Back to Low Levels Based on Trend Earnings Potential
Commodity deck adjustments. Changes to our 2023 and 2024 commodity price forecasts are most notable for lumber. Our average 2023 Western SPF 2x4 benchmark price declines 5% (to US$391/Mfbm) and our average 2024 price declines 8% (to US$443/Mfbm). Our lower lumber estimates are driven by a slower- than-expected supply response and resurgent affordability headwinds. Our lower lumber price forecasts are mitigated by positive revisions to our OSB and markert pulp price estimates.
On average, our 2023 and 2024 EBITDA forecasts decline 7% and 10%, respectively, from previous forecasts (lumber/panel producers: down 13% in 2023 and 15% in 2024). Our new 2025 EBITDA estimates are, on average, 36% above our revised 2024 forecasts (easy comparison from a low base), but are generally below consensus forecasts. We have lowered our target prices for four of the nine names in our coverage universe (lower mid-term FCF estimates and, in some cases, more conservative target multiples). We are making one recommendation change: our LPX rating moves to BUY from Hold after recent share-price underperformance.
We expect that capital-allocation plans will be a focus for discussion at the Annual TD Securities Forest Products Forum on September 26 (register here). Balance sheets remain strong, but surplus liquidity positions have eroded this year in tandem with asset base growth initiatives and lower margins. For lumber and panel producers, we expect less aggressive returns of capital to shareholders in tandem with higher capex (in most cases). We anticipate general messaging around preservation of balance-sheet flexibility. We believe that most wood-product-focused management teams are conditioned to sustaining low leverage ratios.
We reiterate our sector MARKET WEIGHT bias. Although we do not consider the sector to be catalyst-rich in the near term, we believe that valuations for some wood- weighted equities are discounting overly negative assumptions regarding balance- sheet erosion. With lumber equities trading at an average 80% discount to greenfield replacement cost, and with generally strong balance sheets, we are comfortable recommending that investors increase sector exposure on a select basis. Our top pick is WFG.
Be the first to comment on this post