West Fraser Timber Co. Ltd. (TSX: WFG) is a softwood lumber company that is engaged in the production of wood panels and pulp products. The company is active throughout North America, while its lumber mills are located in British Columbia, Alberta, and the Southeastern United States.

Key Updates:

• Reducing Current Capacity: Recently, the company announced that it has it will permanently reduce capacity at its pulp mill in Hinton, Alberta by the end of 2022. This was in-line with the company’s cost control strategy as the capacity reduction will likely to lower its employee levels from 345 positions to 270.

• Rise in Cash Balance: In Q1FY22, the company cash and short-term investments of USD 1,816 million, which increased from USD 1,568 million in Q4FY21. This is expected to enhance the overall liquidity of the company.

• Mixed Guidance: The company’s products are majorly used for the residential construction, repair and remodeling and industrial applications. Historically low mortgage rates, low volumes of homes available for resale augurs well for new home construction, which is a key positive. However, on the flip side sluggish economic growth along with higher interest rate might dampen the housing affordability of the population and could reduce demand for new home construction and the wood building products. Hence, we are not certain of the upcoming demand dynamics and remain on the sidelines.

Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• WFG announced its Q1FY22 result, wherein the company posted its sales of USD 3,110 million, higher than USD 2,343 million in pcp. The surge was supported by higher lumber sales primarily to higher product pricing and increased shipments of SYP lumber.
• Cost and expenses stood at USD 1,683 million, increased from USD 1,464 million in pcp, due to higher cost of goods sold and an increase in Freight and other distribution costs. Operating earnings stood higher at USD 1,427 million v/s USD 879 million in pcp.
• The group reported its net earnings of USD 1,090 million, which is considerably higher than USD 665 million in pcp, supported by higher operating earnings, partially offset by higher tax provision.

Stock Recommendation:

The North American wood products industry is cyclical in nature and a sluggish economic growth might pose threat to the sector. Moreover, inflationary pressures may adversely impact consumers’ discretionary spending on repair and remodeling activity, which remains a major concern and might impact the current construction activities. Notably, the stock of WFG rallied ~27% and ~17% in the last nine months and one year respectively and is due for a correction. Moreover, on the valuation front, the stock of WFG is available at a Price to Earnings multiples of 5.4x on an NTM basis, as compared to the industry (Paper & Forest Products) mean of 0.2x. Hence, considering the aforesaid fact, we give a watch recommendation on the stock of WFG at the last closing price of CAD 114.53 on April 28, 2022.

One-Year Technical Price Chart (as on April 28, 2022). Source: REFINITIV, Analysis by Kalkine Group

Investors can evaluate the stock based on the support and resistance levels provided in the report in case of keen interest taking into consideration the risk-reward scenario. 

 Technical Analysis Summary:

Disclaimer

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