Investment idea - forestry and lumber. - Interfor Corp - CanadaInterfor Corporation IFP - Canada (IFP)
Interfor Corporation is a Canada-based forest products company. The Company and its subsidiaries produce wood products in British Columbia, the United States Northwest and the United States South for sale to markets around the world.
At the time of writing this on, 19/3/2022, the share price at $42 is just a whisker below the all-time-high of $44 reached in mid January.
Interfor Corporation is the 7th largest producer of sawmill timber in the world. Interfor Corporation operates about 15 sawmills in Canada, Oregon, Washington, South Carolina, Arkansas and Georgia. Most of the land on which the company harvests timber is owned by British Columbia. Interfor makes lumber for the construction market, logs for industrial processing, and wood chips for pulp production.
The company says it is “The only pure-play lumber producer of scale”
Why am I buying Interfor?
With a prospective p/e ratio of below 4, a possible dividend yield of over 5%, (see dividend comments below), high historical sales and earnings growth, and sharply rising analysts' forecasts, the fundamentals make Interfor look like the most attractive in the forestry and lumber producer sector. I like the inflation play. It has very strong positive cash flow. Net income, (before non-cash items and acquisitions), is equivalent to one-third of its market cap.
Catalyst for more growth
The timber production market is highly fragmented. This has historically worked to Interfor’s advantage. Multiple acquisitions have have helped Interfor to grow.
Potential takeover offer
Interfor’s annual accounts and cash flow statement show that in 2021 they had net earnings of CAD819 million before items not involving cash, and before investing activities. That’s a third of its CAD 2.4 billion market cap. A takeover of the company could be easily financed out of its own cash-flow, with plenty left for the acquirer. Given their modest size of USD 1.92 billion, they could easily become the target of a larger rival or a value investor. I think Interfor would be an interesting acquisition for a seasoned Canadian investor, such as the 91-year-old Jim Pattison of Jim Pattison Group. He owns 51% of rival Canfor Corp.
The largest investor in Interfor is Letko, Brosseau & Associates Inc. They own 10.8% of Interfor Corp. They are a Canadian institutional investment manger, with an interests in "Growth Through Value Investing" and in "Sustainable investing". They often exercise their shareholder votes, particularly when there are takeover offers, typically refusing what they see as low-ball offers. If Jim Pittard wanted to acquire Interfor he would need to get Letko Brosseau onside first before making any offer.
Lumber Prices
High Lumber prices boost Interfor’s profit.
You are no doubt aware that Lumber prices have been strong over the last 2 years.
Year end Price Random Length Lumber futures on CME front month.
2014 $319
2015 $247
2016 $328
2017 $459
2018 $343
2019 $416
2020 $716
2021 $1227
18/3/22 $1200
The average selling price of Lumber in Q1 2020 was $842. In Q1 2021 it was $1143. So far in Q1 2022 it looks like it is going to be about $960.
See the 50 year and 3 year charts below.
Various reasons are being given for the high Lumber prices. These include flooding in British Columbia. It knocked out road and rail links in December. Mudslides disrupted Vancouver shipments. Beetle infestations, wildfires, and government restraints on tree harvesting limited availability of mature trees. Sawmills were said to be struggling to keep up with demand in part due to a shortage of workers. At the same time the supply chain was being disrupted by the pandemic effect on the transportation network. There simply were not enough vehicles or trucks to get lumber to market, so backlogs were building up at sawmills. The net effect was that supply to the market fell.
At the same time, the Pandemic created unprecedented demand for home improvements. Home improvements more than compensated for any fall in homebuilding due to the pandemic. It was a perfect storm. Supply fell and demand rose.
Since some of these one-off effects are now dissipating we could see lumber prices going lower as supply returns to normal. On the other hand any extra supply might be absorbed by new home construction. Home-buiding is said to have been constrained during the pandemic. Going forwards, lumber prices are likely to be heavily influenced by housing starts. With property prices up around 15% over the last year, it looks like demand is currently strong. Freddie Mac sees house price inflation gradually dropping to 2.5% by 2023, but obviously that still means higher prices than at present, and ongoing demand for new constructions.
According to many articles housing inventories vs demand are at record lows for decades, and it’s likely to take years before the supply and demand balance out.
Dividend:
In May 2021 Interfor declared a "one-time special cash dividend" of $2. At the time they wrote: "“This special dividend reflects a partial distribution of the extraordinary cash flows being generated from record lumber markets” said Ian Fillinger, President and Chief Executive Officer. “We are able to reward our shareholders with this return of capital, while retaining ample financial flexibility to complete our multi-year strategic capital plans, grow significantly through acquisitions and continue to buy back Interfor shares.”
Will this “one-time” special dividend be repeated this year? I am concluding that it is possible for several reasons: Firstly the company has more liquid cash on hand at the end of 2021 than it had at the end of 2020. In fact it has more than four times the cash needed to pay the same dividend. Secondly, the price of lumber remains strong, well above the average during 2021. Thirdly, the company recently expressed strong confidence about the lumber price driven by strong demand from new housing starts, and stated that it is well positioned with a strong balance sheet and “significant available liquidity”. Fourthly the company share capital has reduced by about 10% due to share buy-backs in 2020. This means that the same special dividend would cost less than last year.
If the company pays a $2 special dividend - as per 2021, the yield will be 5%. The decision on dividend should be made in May.
Share buy backs
In 2021 Interfor purchased nearly 10% of its share capital. It was 100% of the amount allowed. The authorisation has been renewed again for 2022, again allowing for the purchase of nearly 10% of the share capital.
Sales Growth
Interfor’s historical lumber sales growth is reported as being 16.41%. In 2021 it was +50% helped by the acquisition. Analysts are forecasting that Interfor’s sales will increase by 17.3% in 2022.
Acquisition
The company made a major acquisition late last year (Eacom Timber Corp). As a result of this and high lumber prices, analysts have been raising their EPS forecasts for 2022. Currently analysts are forecasting EPS of close to CAD 11 per share. in 202 Interfor reported EPS was $12.80. The share price is currently close to $42 so the prospective p/e ratio is low (around 4x). If the company pays a $2 special dividend - as per 2021, the yield will be 5%. The decision on dividend should be made in May. Interfor’s historical lumber sales growth is reported as being 16.41%. In 2021 it was 50% helped by the acquisition. Analysts are forecasting that Interfor’s sales will increase by 17.3% in 2022.
Earnings
The future earnings of the company will, to some extent, depend on Lumber prices. The higher the better. The demand for Lumber will be heavily influenced by new home constructions. Interfor is thus an inflation play, especially if house prices keep rising.
Analysts are increasing their earnings forecasts.
Click below to see the latest lumber price progression
CME:LBS2!
