Demand to Return at Normalcy: Canfor Corporation (TSX: CFP) is a leading Canada based integrated forest products company, which produces softwood lumber. Canfor has a majority stake in Canfor Pulp Products Inc., producer of Softwood Kraft Pulp and a premium kraft paper. 

Q1FY20 Operational Highlights: CFP reported a marginal top-line growth and reported gross sales of CAD 1,170.7 million, as compared to CAD 1,148.7 million in the previous quarter. The increase was driven by the improved demand from the North American market, while the global lumber market declined due to lower demand from China and other Asian countries. Adjusted operating income stood lower at CAD 8.9 million, as compared to CAD 10.9 million in the previous corresponding period. The company reported total shipment of 1.25 billion board feet, marginally higher than the previous quarter, followed by a higher European SPF shipment and a moderate increase in SYP shipments, which more than offset the decline in Western SPF lumber. The company reported a net loss of CAD 70 million, which narrowed from CAD 86.6 million in Q1FY19. The company announced extensive capacity reductions, which is likely to weigh on its FY20 results.

Valuation Methodology (Illustrative): EV/Sales based approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock corrected ~39% in the last one year and is currently trading above its 20 days simple moving average (SMA) of CAD 7.46 with a market capitalization of ~CAD 984.33 million. In order to weather the current COVID 19 crisis, the company reduced its FY20 capital spending by ~CAD 110 million from FY19. The company has a strong liquidity position of ~CAD 400 million, while it is further emphasizing on trimming its working capital which is expected to support the company to sustain during the economic downswing. We believe demand erosion in several regions following COVID-19 outbreak might hinder near term lumber prices, while the long-term outlook remains positive as the situation tends to recover. Also, the US home construction activity is likely to stay depressed in 2020, which is likely to take toll on lumber market. However, recovery in China and increased demand for pulp is likely to offset the challenges in the lumber segment. We have valued the stock by using EV/Sales-based relative valuation metrics and considered companies such as  Western Fraser Timber Co (TSX: WFT), Interfor Corp (TSX: IFP), Norbord Inc (TSX: OSB) etc. as peer group. We have arrived at a target price offering lower double-digit upside from the current level. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing the market price of CAD 7.91 as on April 23, 2020

CFP Daily Price Chart (Source: Thomson Reuters)

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