Morningstar | Rayonier Posts Strong 2Q Amid Attractive Pacific Log Prices; $30 FVE Unchanged. See Updated Analyst Note from 03 Aug 2018
In line with our expectations, Southern log prices have remained soft. However, strong pricing in the Pacific Northwest and New Zealand supported solid second-quarter results for Rayonier. Consolidated adjusted EBITDA rose a substantial 28% to $111 million versus the prior-year period, benefiting from substantial increases in both volume and price. Overall, quarterly results were in line with management's guidance as well as our outlook for the year. Our $30 per share fair value estimate is unchanged, as is our no-moat rating.Pacific coast log prices have remained strong throughout the second quarter, supported in part by tariffs on Canadian lumber, as well as import demand for softwood lumber in fiber-starved China. Weighted average log prices are up 25% in the Pacific Northwest, and 9% in New Zealand versus the prior year. Over the long run, we see less upside from today's prices in both regions relative to that in the U.S. South. Chinese demand will likely shift back, at least partially, to recycled content from North America. Following a near-ban on recycled paper earlier in 2018, softwood pulp and log prices have risen. In the long-run, we think these trade barriers will ease, given that recycled materials are more cost-effective to import. The Pacific Northwest is unlikely to see much timber demand growth, given the far more attractive economics of opening new pulp and lumber mills in the U.S. South.
In contrast, despite a string of quarters with fairly stagnant log prices in the U.S. South, we think stumpage prices will nearly double through 2022. As of late, there's been practically a bi-weekly cadence of lumber mill expansion projects in the South, which will gradually whittle away today's well stocked forests. Accordingly, our outlook for this segment is very bright, with segment-adjusted EBITDA nearly doubling between 2018 and 2022 as prices move higher.
For an in-depth discussion of our lumber industry and timber price outlook, please see our latest Basic Materials Observer, "Lumber Companies Poised to Profit as Millennials Form Households," published Dec. 29, 2017.
Rayonier is a timberland real estate investment trust with assets located in the softwood timber growing regions in the United States and New Zealand. The company operates in five reportable business segments: Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading. The Southern Timber, Pacific Northwest Timber and New Zealand Timber segments include all activities related to the harvesting of timber in addition to lease and license activities, other non-timber activities and carbon credit sales. The company's Real Estate segment reflects all of its land or leasehold sales. The Trading segment reflects the log trading activities conducted by its New Zealand subsidiary.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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