West Fraser Timber

West Fraser Timber (TSX: WFG) is a softwood lumber company that also produces wood panels and pulp products. The company is active throughout North America, with lumber mills in British Columbia, Alberta, and the Southeastern United States. 

Key Highlights:

• Elevated lumber prices remained as the key performance driver: The strong momentum from residential building, maintenance and renovation, and industrial uses across the area has kept North American lumber prices on the rise in recent months. Lower mortgage rates, along with a house construction shortfall caused by years of underbuilding, have remained the primary drivers of construction activity. Additionally, as per the estimate, U.S. housing is likely to touch 1.5 million units in 2021, depicting a surge of 9% over 2020. We believe the company is highly poised to benefit from the additional demand arising from the sector.

Source: Company

• Outpaced the industry on all fronts: The management’s solid determination along prudent steps such as inclusion of Norbord helped the company to leap the industry median margins on many fronts in Q1 2021, which exhibits the competitive advantage within the industry. The chart below gives a glimpse of this.

• Ample liquidity with no near-term maturity: The corporation reported a strong liquidity profile at the end of Q1 2021 at USD 2,551 million, up from USD 1,272 million in Q4 2020, supported by robust cash flow generation, which is a key positive. With the current liquidity, the company would be able to meet its working capital requirements, undertake strategic capital investments, and repay debt. Moreover, the group does not have any immediate debt maturity till mid-2023, which augurs well for the retention of liquidity.
  

Financial overview of Q1 2021 (In millions of USD)

Source: Company

• In Q1 2021, the company posted revenue of USD 2,343 million, higher than USD 890 million in the previous corresponding period (pcp). The increase was supported by strong momentum from the lumber segment (USD 1,198 million v/s USD 547 million in Q1 2020).
• The group reported operating earnings of USD 879 million compared to USD 9 million in pcp. The significant improvement was due to higher revenue, which was partially offset by higher costs and expenses (USD 1,464 million v/s USD 881 million in Q1 2020).
• Net Earnings were reported at USD 665 million, surged from USD 9 million in Q1 2020.
• The company reported cash and short-term investments of USD 1,400 million, while total assets were recorded at USD 9,973 million.

Risks associated with investment

The majority of the company’s revenue is derived from the lumber segment, and a correction in the lumber prices would lead to lower realization, which may hinder the company’s cash flows and margins.

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendation:

The company is holding a diverse wood products portfolio, and with the recent inclusion of Norbord, the entity commands the tag of the leading global producer of oriented strand board (OSB). In the reported quarter the Company witnessed strong demand for lumber and plywood products, resulting in higher product prices. Repair and renovation activity and related demand also continued to trend positively. Furthermore, it has a strong balance sheet with a manageable debt profile. Moreover, the company has identified several cost-saving opportunities within the fiber supply chain segment, while it remained focused to achieve a targeted annual synergy of USD 61 million during the next 18-24 months. Additionally, the demand for the company’s products across the European geography is expected to be robust, supported by change in consumer preference of choosing OSB as an alternative to plywood. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock at the closing price of CAD 91.15 on July 13, 2021. We have considered Interfor Corp, Canfor Corp, Stella-Jones Inc, etc. as the peer group for the comparison.

One-Year Technical Price Chart (as on July 13, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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