Canfor Earnings: Macroeconomic Headwinds Constrain Lumber Prices, but Shares Look Attractive

No-moat Canfor CFP reported first-quarter results that were severely affected by ongoing challenges in the lumber market. Revenue decreased roughly 38% year over year as steep declines in lumber prices were met with lower volume. Slowing housing demand in the United States continued to weigh on lumber demand, but a somewhat resilient repair and remodel market provided some relief in the quarter. Canfor reported a $208 million operating loss in the first quarter, compared with a $740 million profit a year ago, as lower volume raised per unit costs. That said, this was a roughly $100 million improvement sequentially due to a modest rise in European demand. We’ve decreased our fair value estimate to CAD 27 per share from CAD 30 due to our expectation of lower lumber prices through 2023 than we had previously anticipated.

Canfor’s lumber business was expectedly constrained by lower prices during the quarter, caused by moderating demand across its end markets. Revenue fell almost 43% year over year while the segment reported a $170 million operating loss. While this was a slight improvement sequentially, high mortgage rates continue to constrain the housing market and weigh on lumber prices. Repair and remodel markets have held up well considering inflationary pressures affecting consumers, but growth is likely to remain muted amid economic uncertainty. Canfor’s pulp and paper segment reported strong top-line growth of more than 10% year over year. Demand remained stable through the quarter, but rising producer inventories weighed on pulp prices as the quarter progressed.

Canfor’s capacity curtailments announced in the second half of 2022 provided near-term relief, but lumber prices have pushed lower amid ample domestic supply, imports from Europe, and softening new residential demand. While Canfor completed the closure of its Chetwynd sawmill in April, we expect lumber prices will remain at lower levels through the end of the year.