Morningstar | Shifting Asian Log Demand Remains a Drag on Rayonier's Pricing; Lowering FVE to $25.50. See Updated Analyst Note from 06 May 2019
Rayonier managed a decent start to 2019, with strong performance in the U.S. South offsetting weakness in the Pacific Northwest. The company's performance in New Zealand was flat versus the prior-year period. With trade tensions still high between the United States and China, export demand for logs out of the Pacific Northwest declined substantially, weighing on prices. However, margin erosion in the Pacific Northwest was partially offset by a strong quarter in the U.S. South, where increased harvest volume and higher prices were a boon. We've moderated our near- and medium-term price forecasts in the Pacific Northwest to reflect lower export demand than previously anticipated. Accordingly, our fair value estimate falls to $25.50 per share from $27. Our no-moat rating is unchanged.Results were strong in the U.S. South during the first quarter, which was somewhat surprising given the wet weather and relatively soft start for homebuilding in 2019. Strength came from higher stumpage volume, which rose 23% versus last year. However, full-year harvest volume guidance was unchanged, which suggests that subsequent quarters will be softer to avoid overharvesting. Overall, we still expect fairly stable margin performance as prices gradually tick higher in the South after an extended period of weakness. This will largely be driven by increased homebuilding as new households are formed.
Rayonier's Pacific Northwest segment, on the other hand, struggled during the first quarter. Adjusted EBITDA collapsed versus the prior year as falling volume compounded the negative effects of lower prices. We believe much of the price weakness is attributable to reduced export volume to China, which is resulting in regional oversupply of logs. We think log prices should rise in the Pacific Northwest as the year unfolds, largely because Canadian logs have become expensive. This will make lumber mills in the Northwestern U.S. more competitive, increasing demand for logs.
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.
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