On Nov. 26, Prime Minister Mark Carney announced measures to help protect and strengthen the sectors most affected by U.S. tariffs by assisting workers to gain new skills, support businesses as they modernize and diversify and boost domestic demand for Canadian goods. The announcement details can be summarized under three headings: liquidity and financing, demand support and structural policy.
The focus of the liquidity initiatives are to reduce bankruptcy or closure risk for leveraged or high-cost lumber mills through initiatives such as the BDC Softwood Lumber Guarantee Program – a top-up that earmarks $500-million from the Large Enterprise Tariff Loan Facility for softwood producers facing liquidity pressure – and enhancing EI worksharing and training grants.
The demand support initiatives include working with railway companies to cut freight rates for transporting Canadian steel and lumber interprovincially, prioritizing shovel-ready, multiyear projects that use Canadian wood products and creating demand for Canadian Wood products.
The structural initiatives include a “forestry concierge” at Natural Resources Canada to help mills navigate loans and programs as well as an industry-led transformation task force to expand, diversify and identify opportunities and support affected communities.
Recent Globe and Mail headlines are also telling us a story:
- Legault warns 30,000 Quebec forestry jobs could be lost as trade war continues
- West Fraser Timber shutters mill in 100 Mile House, B.C., affecting 165 jobs
- Lumber industry warns of crisis as B.C. and Ottawa prepare for softwood summit
The publicly traded forestry stocks in Canada have seen in some cases dramatic drops in share price over the past one and five years. Will these latest government measures help and what are the stockcalc models telling us?
The screen
We used StockCalc’s screener to select the top 10 listed forest product stocks by market capitalization on the Toronto Stock Exchange. We then used StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see if it is undervalued or overvalued compared with its price.
Overview of the techniques used:
- Discounted cash flow (DCF value) is a valuation technique in which cash-flow projections are discounted back to the present to calculate value per share.
- A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies.
- An adjusted book value (ABV) is calculated by multiplying book value per share by its 10-year average price-to-book ratio.
- If we have analyst coverage, we may consider the consensus target price in our modelling.
More about StockCalc
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What we found
This industry comprises companies that grow, mill or manufacture wood products for construction or manufacture paper and paper-related products from wood pulp or other fibres. As with many industries, stock prices are very dependent on underlying commodity prices and, for this industry, duties and tariffs. The price of lumber has been trading between US$450 and US$650 per thousand board feet over the past three years and currently trades at US$550. U.S. housing starts over that time period have ranged between 1.25 and 1.6 million units, with August figures (the most recent available) coming in at 1.307 million units, down 8 per cent from July and 6 per cent lower than one year ago.
Since the softwood lumber dispute started more than four decades ago, the U.S. has periodically imposed countervailing duties (CVD) and anti-dumping duties (AD) on Canadian softwood lumber, which Canadian companies have to pay (In most cases, the Canadian exporter on shipments to the U.S. is listed as the importer, so in effect, the Canadian exporter pays the duties). U.S. President Donald Trump further increased tariffs on Canadian softwood lumber effective Oct. 14 this year by an additional 10 percentage points, taking the total to 45 per cent. Canadian forestry companies have paid more than US$10-billion in duties since 2017.
Five of these stocks pay a dividend and all but two (Stella-Jones, Cascades) have a negative one-year stock price return. Let’s look at a few companies:
Acadian Timber Corp. ADN-T provides forest products in Eastern Canada and the Northeastern United States. The company also owns and manages freehold timberlands in New Brunswick and Maine; and provides timber services relating to Crown-licensed timberlands in New Brunswick. Acadian Timber Corp. was founded in 2006 and is headquartered in Edmundston, N.B. Acadian generated sales of $23-million and earnings per share of 16 cents for the quarter ending Sept. 27, and announced a dividend of 29 cents for Jan. 15. Our models for ADN-T support the current price and show modest upside from here over the next 12 months. ADN-T also has a 7.4-per-cent dividend yield.
Canfor Pulp Products Inc. CFX-T produces and supplies pulp and paper products worldwide. The company is headquartered in Vancouver and operates as a subsidiary of Canadian Forest Products Ltd. Our non-cash flow models seem to be implying higher upside and the analyst consensus is also indicating that, but the DCF model shows significant risk. This stock is down more than 50 per cent over the past 12 months and down 90 per cent over the past five years. In its most recent quarterly report, Canfor Pulp Products Inc. noted challenging global pulp markets with elevated inventories and weak demand and negotiations with lenders for additional covenant relief. Over the next five to 10 years the industry is looking at a more consolidated supply base, modest demand growth and prices need to be higher than today to keep mills open.
You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The “StockCalc Valuation” column is a weighted calculation derived from the models and Analyst target data if used.
Summary: The measures announced by the federal government will help the sector but the bigger picture is really about duties and a supply/demand balance that has traditionally been difficult to obtain given this industry’s capital intensity.
Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis. Brian Donovan, CBV is the president of a Canadian fintech based in Miramichi, N.B. Brian owns positions in Canfor and Western Forest Products.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.