Report by ERA Research

Amid a sluggish US housing market and macroeconomic challenges, demand for structural panels and virtually all solid-wood products is languishing. North American panel producers have carefully managed supply through reduced operating rates, mill curtailments, and delayed capacity expansions to keep markets somewhat tensioned. However, an influx of offshore imports threatens to undermine these efforts and push markets into oversupply. Offshore plywood imports jumped to 177MMsf in May, meaning producers Boise Cascade Co and West Fraser Timber Co Ltd must monitor South American supply closely as weakening domestic demand cannot easily absorb a material increase. Conversely, offshore OSB imports plummeted to less than 1MMsf, keeping the supply balance tensioned for producers such as Louisiana-Pacific Corp, WFG, and Weyerhaeuser Co. Moving into the summer doldrums, investors should maintain caution on all solid-wood leveraged names given an expected seasonal slowdown, keeping in mind that plywood holds more downside risk now.

Report by MYST Advisors

MYST’s buyside events continue to draw impressive attendance while consistently delivering strong results. This Forum was notable for highlighting several foreign companies with imminent US listings (Ashtead, Guardian Metal Resources, SK Square) as well as Healthcare stocks (Cigna, Qiagen). Other ideas presented include:

Boise Cascade (BCC) - trough multiple at cycle bottom with potential business split under new CEO. TP $207 (145% upside).
Core Scientific (CORZ) - robust HPC pipeline not reflected despite buildout running ahead of schedule. TP $34 (95% upside).
Ralliant (RAL) - cyclical inflection masked by “one-time” cost headwinds. TP $60 (35% upside).
VSE (VSEC) - compelling entry point for “transformational” aerospace story. TP $300 (35% upside).

Materials

Report by ERA Research

Following eye-watering share-price appreciation over the past 12 months (+80%), ERA believes that BCC has run ahead of fundamentals. A lasting recovery in US housing over the coming years could see wood products buyers switch back to purchasing larger orders directly from mills, which would threaten top-line growth in BCC’s distribution business. Further, a raft of new OSB supply, coupled with rising plywood imports from offshore should put downward pressure on structural panel prices as 2024 progresses. At current levels, equity price risk is downside weighted and evidence that structural panel prices have reached a near-term peak (likely this quarter) should present an attractive entry point for building short positions. TP $108 is based on a 5.0x multiple applied to 2024 EBITDA of $691m.

Materials

Report by ERA Research

The outlook for lumber / panel producers (Canfor, West Fraser, Boise Cascade, Louisiana-Pacific) is difficult, with no obvious upside catalyst before a recovery in US housing (unlikely before late 2023). ERA expects pulp prices to move lower through 1H23. Anticipated price declines are now almost fully priced into pulp names (Mercer, International Paper). In packaging, more pain lies in store for containerboard (Westrock) and a raft downtime will be needed to combat weaker demand and offset new capacity. Boxboard will outperform (Graphic Packaging, Clearwater Paper), with both demand and prices expected to remain robust.