DBRS Confirms Canfor Corporation at BBB (low), Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Notes rating of Canfor Corporation (Canfor or the Company) at BBB (low) with a Stable trend. The confirmation reflects that despite a slight increase in debt, Canfor’s credit metrics have remained solid and compatible with the current rating as expected, while 2014 results were comparable to 2013. Moreover, the rating continues to be supported by Canfor’s low-debt financial profile, top-quartile operating efficiency and material diversification in the Asia market. Going forward, DBRS expects Canfor’s results to be modestly stronger, as continuing recovery in the U.S. housing market and the benefit of a weaker Canadian dollar more than offset softer Asia lumber market conditions and weaker global pulp market conditions. Therefore, in the absence of a significant rise in debt, which DBRS does not foresee, Canfor’s credit metrics are expected to remain solid and compatible with the current rating for the foreseeable future.

Canfor has continued to maintain a low-debt financial profile, with adjusted debt leverage (operating leases as debt) below 25% since 2010, and currently at 20% at the end of 2014. As a company with cyclical earnings, this policy results in materially lower financial risk. On the operating side, Canfor has continued to improve operating efficiencies with targeted capital spending at its sawmills over the past few years. As a result, higher operating margins were achieved and DBRS considers Canfor as a top-quartile lumber producer. In terms of diversification, Canfor’s geographic sales mix has strengthened dramatically since 2009, with a material increase in China; together with Japan, Asia sales accounted for approximately 35% of 2014 lumber sales. Despite the recent slowdown in China’s economic growth, DBRS views the Chinese demand as sustainable going forward due to its large economic size.

DBRS notes that Canfor has been allocating more capital in the U.S. South lumber business through acquisitions and improvement projects. DBRS views the activities as positive to its business profile, in consideration of the abundant fibre supply in the region. In terms of the cash flow impact from these activities, DBRS expects them to be fully funded with internal cash generation in 2015 and no impacts on the credit metrics.

DBRS recognizes Canfor’s credit metrics are at the higher end of the rating range; however, due to Canfor’s significant dependence on the U.S. housing market and historic volatility, DBRS would need to see normalization of the U.S. housing market conditions (1.2 million to 1.5 million units) while Canfor maintains a low-debt financial profile in order to consider positive rating action. Having said that, DBRS considers Canfor’s strong credit metrics supportive to the rating, which provides extra cushion against unexpected drop in earnings or significant rise in debt.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Forest Products Industry, which can be found on our web site under Methodologies.