Morningstar | Canfor Schedules Additional Downtime for Canadian Mills in 1Q; Reducing FVE to CAD 23. See Updated Analyst Note from 17 Dec 2018
Canfor announced that it will take the equivalent of 55 million board feet of downtime in the first quarter of 2019, an extension from that announced for the fourth quarter. Accordingly, we've slightly trimmed our near-term outlook to reflect lower prices and reduced production. This reduces our fair value estimate to CAD 23 per share from CAD 23.50. Our no-moat rating is unchanged.After Western SPF benchmark lumber prices hit nearly $560 per million board feet in May due to a number of transportation constraints, they've plunged 45% to just above $300/mmbf. Capacity has continued to come on line following a period of hefty profit margins, and earlier supply constraints have passed. At prevailing low prices, some of Canfor's mills have razor-thin or potentially negative margins. We've adjusted our forecasts to incorporate an "effective" capacity of roughly 3.8 billion board feet, down from the 4.0 billion called out in the latest annual report.
Despite our modest cuts to near-term prices and production, our fair value estimate only falls slightly. Even after reducing our fair value estimate to CAD 23, the shares of Canfor look undervalued based on our long-term outlook.
Canfor is an integrated forest products company with facilities in Canada and the U.S. Co. has two reportable segments: Lumber and Pulp and Paper. The Lumber segment includes logging operations, and manufacturing and sale of various grades, widths and lengths of lumber, engineered wood products, wood chips and wood pellets. The Pulp and Paper segment includes purchase of residual fibre, and production and sale of pulp and paper products, including Northern Bleached Softwood Kraft and Bleached Chemi-Thermo Mechanical Pulp as well as energy revenues.
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