DBRS Confirms West Fraser Timber Co. Ltd. at BBB (low)

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debenture rating of West Fraser Timber Co. Ltd. (West Fraser or the Company) at BBB (low). The trends remain Stable. The confirmations reflect West Fraser’s ongoing commitment to maintaining a conservative financial profile and its solid business risk profile. The ratings are underpinned by the Company’s low-cost operations, which have enabled positive operating cash flow generation even during market downturns, and its access to sufficient high-quality wood fibre. Exposure to cyclical end markets and U.S. trade protectionist policies are challenges.

Over the last 12 months (LTM) through H1 2017, West Fraser has delivered strong operating results. Key drivers included the continued recovery of the U.S. housing market, which supported higher volumes and pricing, higher pulp shipments and price realizations, continued steady contributions from the panel business and support from a weaker Canadian dollar in H1 2017. Segment EBITDA margins rose notably in the Lumber and Pulp divisions in LTM H1 2017 versus F2015, and the Company-wide EBITDA margin rose to 18.5% from 10.7%. Operating cash flow of $734 million during the period easily covered capital spending and dividends and allowed for some debt reduction and share buybacks. The cash balance rose to $231 million. In July, West Fraser announced the acquisition of Gilman Company’s (Gilman) lumber production assets in the U.S. South with 700 million board feet of capacity for approximately USD 430 million. The purchase is to be funded with cash on hand and credit line drawings. As expected, the U.S. Department of Commerce has applied certain duties on West Fraser’s lumber exports to the United States. West Fraser is currently financially well positioned to manage this challenge (See Softwood Lumber Trade Dispute in the rating report complementing this press release).

DBRS believes that the Gilman acquisition will enhance the Company’s business risk profile by increasing its U.S.-based lumber production operations to 43% of capacity but presents integration issues as with any acquisition. West Fraser’s U.S. lumber operations provide ready access to the fast-growing U.S. Southeast housing market; a natural currency hedge, as lumber prices are denominated in U.S. dollars; and decreased exposure to U.S. trade protectionist practices targeting Canadian lumber shipments to the United States.

Although financial metrics pro forma incorporating the Gilman acquisition are projected to drop materially, the current metrics are extremely strong, and the post-acquisition financial profile is assessed to remain well above the current overall rating. In the years ahead, although DBRS does not expect any material debt reduction, financial metrics should improve with the contributions from the increased capacity arising as a result of the acquisition.

West Fraser has demonstrated its commitment to a conservative financial profile. DBRS expects this commitment to continue going forward, even as the Company continues to acquire additional operating assets, pay its reliable dividend, buy back shares and invest meaningfully in growth and maintenance projects to keep its low-cost profile and grow organically. Therefore, the Company remains well positioned to manage the inherent cyclicality of its underlying businesses, as well as other challenges such as the ongoing softwood lumber dispute. Should the Company deviate from this commitment and undertake large, debt-financed acquisitions, or should a particularly harsh and prolonged market downturn materially weaken the Company’s financial profile over a number of years, DBRS may consider a negative rating action.

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.

The principal methodology is Rating Companies in the Forest Products Industry, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.