Lower Industry Demand to Hurt Capacity utilization:  West Fraser Timber Co. Ltd (TSX: WFT) is a softwood lumber company which operates across North America. The group alsoinvolve in the production of pulp products and wood panel. The group has lumber mills in British Columbia, Alberta, and the southeastern United States.

The Company reported that it had received an additional CAD 150 million in credit facility. The Group reported that including the new credit facility, it now has a revolving credit facility of ~$444 million as on March 31, 2020.

The company expects prodcution to be negatively impacted by the supply-chain drisruptions and market demand. The company has been operating below capacity and announced a downtime at its Cariboo Pulp joint operation.

Q1FY20 Financial Highlights: WFT declared its quarterly results, wherein the company reported sales of CAD 1,195 million, as compared to CAD 1,241 million in the previous corresponding quarter. Due to the ongoing COVID 19 crisis, the production took a hit as the group reported a lower production from both the segments. Sales slumped from all the major geographies except the United States, which reported a decent sales improvement on y-o-y basis amidst a detoriorating market scenario. Operating earnings improved to CAD 13 million, as compared to CAD 10 million due to a decline in cost of product sold, ammortization & selling, general and administrative expense. However, higher export duties and equity-based compensation remained a drag. Higher price realization from lumber and pulp segment further supported the earnings. The Group reported adjusted net earnings of CAD 28 million, as compared to CAD 22 million in the prior year.

Q1FY19 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock corrected ~41% in the last one year. However, the stock made a sharp recovery and reported a ~50% gain during the last one month and currently trading above its 20 days and 50 days simple moving average of CAD 29.99 and CAD 36.48, respectively. We expect the company’s production to go down, which is likely to hurt its financials in the near term. Both, the supply and demand are expected to stay low in 2020. We expect a significant reduction in the industrial and construction activities across the North American market, which further results in lower lumber prices on account of a demand slowdown. Nevertheless, the company has a strong liquidity position, and we believe it remains well-positioned to sustain the current downturn. WFT stock is trading at an EV/EBITDA multiple of 12.3x, which is in line with the industry average. Given the uncertainty surrounding the economy and the stock is adequately priced, we prefer to remain on the sidelines. Hence, we recommend a ‘Watch’ stance on the stock at the Closing market price of CAD 40.09 as on April 29, 2020.

WFT One-Year Daily Price Chart (Source: Thomson Reuters)

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