Morningstar | Norbord Notches Strong 2Q Amid Elevated Panel Prices; Announces CAD 4.50 Dividend. See Updated Analyst Note from 02 Aug 2018
We were impressed by yet another strong quarter from Norbord. With both panel and lumber prices surging beyond even our lofty expectations for the year, sales and EBITDA both remain ahead of pace for the year. We've increased our annual forecast for the Random Lengths OSB index to reach $410 before easing next year as additional supply enters the market. Accordingly, we've lifted our fair value estimate to CAD 46 per share from CAD 44 to account for higher near-term cash flows. Our no-moat rating is unchanged.In North America, sales rose 34% to CAD 577 million during the second quarter, with nearly three fourths of the increase explained by elevated wood panel prices. Panel prices were up nearly 30% from last year, peaking in the mid-$400s early this summer. With Canadian supply constraints beginning to ease, we think those prices will begin to ease as well over the coming months. Even so, EBITDA margins should remain above 35% for the year. Management highlighted a number of capital projects aimed at adding capacity throughout its regional footprint, which should position the company to capitalize on what we believe will be a strong few years for wood product pricing. This strength will largely be driven by steady increases in new-home construction in the United States, driven by household formation among younger adults.
Management announced a one-time CAD 4.50 dividend to shareholders of record as of Sept. 1, reflecting a fairly balanced approach to capital allocation. With capital spending still poised to decline from 2017 to 2018, Norbord is clearly taking a measured approach in adding capacity, but not adding enough to severely reduce panel prices. We're also pleased that Norbord's management team has continued to keep debt levels low despite extremely healthy cash flow conditions.
Norbord is a producer of wood-based panels with 17 plant locations in the U.S., Europe and Canada.
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