Softening Demand Hampers Canfor’s Q4 Results

No-moat-rated Canfor CFP reported lackluster fourth-quarter results as lower lumber prices and softening demand continued to weigh on the company’s financial performance. Slowing housing demand caused lumber prices to decline in the second half of 2022 and pressured Canfor’s shipments. Canfor reported a $308 million operating loss in the fourth quarter, compared with a $69 million loss a year ago, largely due to lower selling prices and lumber shipments, which led to an increase in per unit costs. We’ve decreased our fair value estimate to CAD 30 from CAD 35 per share due to reduced near-term revenue growth and profitability in our forecast.

Canfor’s lumber business reported a 16% decrease in revenue year over year for the fourth quarter while posting a $104 million adjusted operating loss. Higher mortgage rates in the United States continue to pressure new home construction and housing affordability, which has negatively affected lumber demand and pricing. Canfor’s previously announced curtailments in western Canada did not curb supply quick enough to match falling demand, with the company recently announcing the permanent closure of its Chetwynd sawmill to address this oversupply. Due to the severity of lumber price declines, we expect additional curtailments in the region during the year as the industry works to regulate supply.

Despite Canfor’s capacity curtailments in Western Canada, the company has committed to capital projects in the southern U.S., largely due to the abundance of timber and the region’s low-cost position. Canfor is currently building two new sawmills in the region and modernizing its Houston mill. The additional capacity from these projects should somewhat offset the capacity taken offline from curtailments in British Columbia. While near-term results are likely to remain pressured, we think Canfor’s pivot away from western Canada while increasing its presence in the U.S. south will position the company to capitalize on future demand.