Canfor Earnings: Iran War Adds More Burden to Already Challenged Market

Key Morningstar Metrics for Canfor

• Fair Value Estimate
  : C$17.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : None
• Morningstar Uncertainty Rating
  : High

What We Thought of Canfor’s Earnings

Canfor’s CFP first-quarter adjusted loss per share of C$0.59 improved from the fourth-quarter’s C$1.22 loss but nearly doubled from the year-ago loss of C$0.32. Lumber demand remains soft, and higher oil prices caused by the Iran war will not help housing construction demand.

Why it matters: Canfor provides raw materials for various end markets, especially housing, so if end-market demand is weak due to macroeconomic problems, its results suffer. Both the lumber and pulp segments posted worse adjusted operating losses year over year, but they improved from the fourth quarter.

• The lumber segment’s C$63.7 million operating loss came despite some supply tightness helping pricing (southern yellow pine 2x4 pricing rose by over 5% year over year). Lower shipments across all regions, especially in Europe due to weather, more than offset the pricing tailwind.
• Management said North American lumber markets will soften in the second quarter despite better recent pricing, as supply will rise amid subdued demand from macroeconomic uncertainty. Europe should see better pricing for spruce in the second quarter and a seasonal volume improvement.

The bottom line: We are increasing our fair value estimate for no-moat Canfor to C$17 per share from C$16. The change is from the time value of money and lowering our weighted average cost of capital by 30 basis points to 10.2%. The WACC change is a more granular expression of our existing risk assessment.

• We think Canfor’s balance sheet is in good shape to handle the current uncertain environment, with available liquidity totaling C$966.7 million at March 31. In March, Canfor extended the maturity on its now approximately C$1 billion operating loan facility to March 2030 from June 2029.
• The company received approval in March for its normal course issuer bid. The program expires on March 22, 2027, and permits buying back up to about 5.8 million shares, about 5% of the company. No buybacks occurred in the first quarter.