DBRS Morningstar Upgrades West Fraser Timber Co. Ltd. to BBB; Maintains Stable Trends

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating and Unsecured Debentures rating of West Fraser Timber Co. Ltd. (West Fraser or the Company) to BBB from BBB (low). All trends remain Stable. The ratings upgrade follows the improved outlook for wood products combined with the Company's continued commitment to conservative financial policy, leading to much stronger credit metrics and the improved size and product/market diversification of the Company, following the acquisition of Norbord Inc. (Norbord). The Company's ratings are underpinned by its large size, low-cost operations, diversification among a wide range of products and markets, and financial resilience through its commitment to conservative financial policy. The ratings are constrained primarily by West Fraser’s high exposure to the inherent cyclicality of the forest products industry, and DBRS Morningstar notes that the recent acquisition of Norbord does not reduce West Fraser's exposure to cyclicality in the housing construction segment, as the prices of lumber and OSB (oriented strand board; most of Norbord’s production capacity) have historically exhibited a high correlation.

West Fraser reported record earnings and operating cash flow for the last 12 months (LTM September 2021) that were much higher compared with 2020 because of the completion of the acquisition of Norbord on February 1, 2021, along with record pricing levels for lumber and OSB, particularly during H1 2021. The Company generated about $3.2 billion in free cash flow (FCF; after dividends and capital expenditure (capex)) during the LTM Sep 2021. During the same period, West Fraser redeemed $665 million of outstanding Norbord notes, which were assumed part of the acquisition, and repurchased $1.2 billion of common shares under both its Normal Course Issuer Bid and Substantial Issuer Bid programs. During Q4 2021, the Company acquired two mills in the Southern U.S. for a total of $580 million with cash on hand. The Company intends to spend another $180 million on a strategic capital program by 2023 aimed at expanding capacity and improving efficiency in a few of its North American lumber and OSB mills. Recently, the Company lowered its capex guidance in 2021 to $400 million from its previous guidance range of $400–$450 million, because part of the spending will be pushed into 2022.

In 2022, DBRS Morningstar expects West Fraser to generate a healthy operating cash flow, if the current market conditions sustain, and that capex will be higher than in 2021. DBRS Morningstar expects the Company to fund additional share repurchases from FCF and cash on hand, which will likely have little to no impact on credit metrics. In 2022, DBRS Morningstar expects West Fraser's key credit metrics to remain strong for the BBB rating category.

The Company's liquidity is strong, supported by a large cash balance of $2.1 billion as at September 30, 2021, and the $1 billion undrawn revolving credit facility. DBRS Morningstar expects the Company to maintain a strong financial risk profile with debt-to-EBITDA at or below 1.0 times for the BBB rating. While any further positive rating action will require a material improvement in the Company's business risk profile, ratings could be negatively affected with a sustained material deterioration in the Company's financial risk profile.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Rating Companies in the Forest Products Industry (March 16, 2021; https://www.dbrsmorningstar.com/research/375290), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 under Related Documents or by contacting us at [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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