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

DBRS has today confirmed both the Issuer Rating and Unsecured Debentures rating of West Fraser Timber Co. Ltd. (West Fraser or the Company) at BBB (low). The trends remain Stable. The confirmation reflects that West Fraser has performed in line with expectations of stronger lumber results and maintained solid credit metrics in 2013. The Stable trends reflect DBRS’s view that the credit metrics are expected to remain solid in 2014 driven by stronger lumber performance, despite modestly higher leverage. Moreover, West Fraser’s business profile remains unchanged and continues to support the investment-grade BBB (low) rating.

West Fraser generated much stronger lumber results in 2013, which were driven by favourable market conditions as the U.S. housing market recovered. In H1 2014, temporary negative market factors led to poorer lumber performance and weaker overall results. Weather-related transportation issues resulted in substantially weaker Canadian shipments in Q1 2014. As well, inventory build-up from Q1 2014 later flushed the market and pressured lumber prices in Q2 2014. In H2 2014, DBRS expects higher earnings driven by stronger lumber results. Specifically, prices are expected to improve from the Q2 2014 level as the temporary factors disappear, while volume is expected to increase due to the recent acquisitions of new capacities. Moreover, DBRS expects demand to improve based on the continuing recovery of U.S. housing market. With that being said, DBRS recognizes that the U.S. housing market was modestly weaker than expected in H1 2014, but maintains the view that the U.S. housing market recovery will continue based on the gradual improvement of U.S. economy.

In terms of cash flow, H1 2014 generated negative free cash flow due to the combination of acquisitions, aggressive capital expenditures (capex) and share buybacks. The deficit was funded using operating loans and cash on hand. As a result, West Fraser’s leverage level increased modestly. In H2 2014, DBRS expects the Company to generate free cash flow as cash flow from operations and inventory reductions more than cover the capex and share buybacks. In turn, DBRS expects some debt reduction from the current position. However, leverage will likely remain above the 2013 level. Despite modestly higher leverage, with higher cash flow from operations and EBITDA in 2014, DBRS expects West Fraser to maintain solid credit metrics well above the current rating range.

DBRS notes that the Company continues to strengthen its low-cost producer position with an ongoing capex investment program. The addition of lumber facilities in the southern United States is also a positive because of the growth in lumber demand and the abundant timber supplies in the region after years of depressed harvests. Together, these developments would strengthen West Fraser’s business profile modestly.

In the medium to long term, West Fraser’s operating performance is likely to benefit from a couple of market developments. The reduced availability of logs from the British Columbia interior and Alberta due to the mountain pine beetle infestation is expected to limit the Canadian supply, benefiting U.S lumber producers. Additionally, the excessive U.S. south timber inventory is expected to keep log prices within the region at reasonable levels.

DBRS notes that the Company’s cash and unused credit lines of $432 million (as of June 30, 2014) provide more than sufficient liquidity to fund short-term funding requirements. In terms of upcoming debt maturity, DBRS expects the USD 300 million senior notes due October 2014 to be either refinanced with West Fraser’s credit facility ($406 million available as of June 2014) or new debt issuance.

In conclusion, DBRS expects the credit rating of West Fraser to remain stable for the foreseeable future supported by solid credit metrics, which are well above the current rating range, and an investment-grade business profile.

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

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