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Summary of Operations
West Fraser Timber (WFG) is a Vancouver-based wood manufacturer that operates across Canada and the United States, whose products include lumber, oriented standard board (OSB), pulp, plywood, wood chips, and renewable energy. Most of its timber comes from forestlands in British Columbia and Alberta owned by the Canadian government (WFG’s licenses for these expire in 2033 and 2035). The company hires third-parties to log these lands and purchases additional wood product from other third-parties. Operations are highly integrated, with the same tree being usable for multiple products.
In 2021, WFG completed a share-based acquisition of Norbord, a similar company with with significant operations in the American South. Consequently, most of WFG’s shareholders are now located in the U.S., and their future dividends and reports will be done in USDs instead of CADs. For the reported performance of 2021, the company boasts an operating margin of 41.2% and a very healthy balance sheet with almost no debt. About 80% of current revenues come from the lumber and OSB segments.
Strategy
The Norbord acquisition was intended to diversify WFG’s operations into other regions and product lines. The Canadian forestland, for example, faces dangers from beetle infestations, forest fires, and potentially the effects of climate change. Furthermore, the company hopes this new scale will provide adequate resources to achieve the next level of growth that its previous size did not offer. While its Canadian operations are vertical in nature, Norbord was a horizontal expansion, and WFG will continue to focus on expanding horizontally by building or acquiring new mills and facilities.
Because of the dangers posed to its forestlands, its vulnerability to supply-chain disruptions, the capital-intensive nature of its operations, and the cyclicality of the industry, WFG keeps low levels of debt and maintains a highly liquid balance sheet.
Growth and the Future
Demand for OSB rises as it continues to be a preferred material for new houses. Low interest rates also favor the current housing market, but with the timeline of these low rates unclear, an increase could offset the advantage of OSB. Where WFG does enjoy economies of scope with its other products, the benefit of such scope is on the margins, not on its core earnings. Growth will likely depend on the company’s ability to realize efficiencies from the Norbord acquisition, as well as to purchase new facilities at low costs.
Valuation
It was tricky to value this company because the Norbord acquisition was major expansion of operations and made with non-cash, so I needed to seek data on both companies’ cash flow histories to calculate what the current entity can produce. Furthermore, WFG itself reported in Canadian dollars prior to 2021, so I needed to convert the last decade’s worth of data into U.S. dollars. Now that have that data and have done the conversion, the hard part is over.
Growth Assumption: 6%
Intrinsic Value Per Share: $137.56
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