canfor corporation university of victoria student research cfa institute research challenge 2012

CANFOR CORPORATIONUniversity of Victoria Student ResearchCFA Institute Research Challenge 2012

Presentation Highlights

Overview

Financial Analysis

Valuation

Risks

Increasing Lumber Demand

Rising Lumber Prices

Competitive Advantages

$14.41

$11.70

Company Overview

Headquartered in Vancouver, British Columbia

Lumber mill operations in British Columbia, Alberta, Quebec, Washington State, South Carolina, North Carolina

Largest Annual Production Capacity in North America (5.2 billion board feet)

50.2% ownership stake in Canfor Pulp & Paper

Overview

Financial Analysis

Valuation

Risks

Source: Canfor

North American Operations

Overview

Financial Analysis

Valuation

Risks

Company Overview: Major Markets

Source: FAOSTAT

Industry Overview:US Housing Starts and Lumber Prices

United States: Expected recovery in the housing market will drive up lumber prices

Source: Random Lengths, ForecastChart

US Housing Starts

Lumber Prices

Overview

Financial Analysis

Valuation

Risks High growth potential in US paired with Continued new growth in China

Potential for Supernormal Sales Growth in medium term

Industry Overview: Harvesting Restrictions in China

Overview

Financial Analysis

Valuation

Risks

Restricted

Industry Overview: Growing Supply Gap in China

Overview

Financial Analysis

Valuation

Risks

Sawnwood Lumber Exports to China (MM Board Feet)

Overview

Financial Analysis

Valuation

Risks

Competitive Positioning: ChinaCompetitive Positioning: North America

FINANCIAL ANALYSIS

Financial Analysis: Return On Equity

Overview

Financial Analysis

Valuation

Risks

Financial Analysis:Lumber Sales

US Housing Rebound

Increasing Chinese SupplyGap

Rising LumberPrice

Overview

Financial Analysis

Valuation

Risks

Canada

China

United States

Japan

Other

2010

2015E

Financial Analysis:Pulp Sales

WeakeningDemand

ExcessSupply

DroppingNBSK price

Overview

Financial Analysis

Valuation

Risks

Canfor Pulp and Paper is not a sustainable contributor to Canfor’s Value

Financial Analysis:Projected Ratios

2010 2011E 2012E 2013E 2014E 2015E0%

5%

10%

15%

20%EBITDA Margin

2010 2011E 2012E 2013E 2014E 2015E0%2%4%6%8%

10%12%

Debt to Capital Ratio

2010 2011E 2012E 2013E 2014E 2015E0%

10%

20%

30%

Solvency Ratio

2010 2011E 2012E 2013E 2014E 2015E -

1.00

2.00

3.00

4.00

Current Ratio

Overview

Financial Analysis

Valuation

Risks

Stability Level

VALUATION

Valuation

Discounted Cash Flow

Multiple Analysis

EBITDA Regression

Final Value, December 2012

Overview

Financial Analysis

Valuation

Risks

Corrects for potential inaccurate cyclical foresight of DCF

Captures the effect of short-term cash flows on Canfor’s value

Discounted Cash Flow: Asset Proportions

Overview

Financial Analysis

Valuation

Risks

Discounted Cash Flow: Post-Analytical FCFE Projection (2016 Onwards)

Overview

Financial Analysis

Valuation

Risks

FCFE Growth Cycle Illustration

5 Year Positive Growth Min: 0%, Max: 2.5%

3 Year Negative Growth Min: 0%, Max: 2.5%

Discounted Cash Flow: Analytical Phase (2012-2015)

Change In Non-Cash Working Capital

Net Borrowing

Non-Cash Charges

Net Income

Capital Expenditures

FCFE, NET: $102.94 $104.03 $120.23 $108.402012 2013 2014 2015

Inflows

Outflows

Overview

Financial Analysis

Valuation

Risks

Continued deleveraging Notable fixed capital investments December 2012 DCF Value: $15.40

Multiple Analysis: Similarity Assessment

Overview

Financial Analysis

Valuation

Risks

Multiple Analysis: Weighted Average Multiple

Enterprise Value: $2,051,192,000

2012 EBITDA: $233.09M

Weighted Average EV/EBITDA: 8.80x

# Shares Outstanding:142,710,000

FY End 2012 Share Price:

$14.37

Overview

Financial Analysis

Valuation

Risks

West Fraser Timber and Weyerhaeuser are the most comparable to Canfor

EBITDA Regression: Variables

Overview

Financial Analysis

Valuation

Risks

Method: Regress regional EBITDA over the following macroeconomic variables in each region.

EBITDA Mean: $171 Million

Final Value

Statistical Approach•10% Weighting

Discounted Cash Flow•40% Weighting

Multiple Analysis•50% Weighting

Final Value, December 2012

$14.37

$15.40

$10.58

$14.41Overview

Financial Analysis

Valuation

Risks

RISKS

Investment Risks

Overview

Financial Analysis

Valuation

Risks

 Investment Risks

Highest Impact Disappointing US housing start growth

  Lower than expected Chinese lumber demand growth

  Sustained lull in lumber prices

  Exchange rate risk

  Dangers to natural environment

  Government regulation changes

  Failure to successfully renegotiate labour union terms

Lowest Impact Termination of Softwood Lumber Agreement (SLA)

BUYQUESTIONS?Rising Lumber Demand

Growing Lumber Prices

Strong Competitive Positioning

Appendix A: Financials

Appendix B: Financials

Appendix C: Financials

Appendix D: Financials

Appendix E: FCFE Sensitivity Analysis

Appendix F: DCF Inputs

Appendix G: Comparables

Appendix H: Company Similarity

Appendix I: Comparable Fundamentals

Appendix J: Applied Ratios

Appendix K:Regression Variables

Appendix L: Exchange Rates

Appendix M: Management Change

Appendix N: Mountain Pine Beetle

Entire ProvinceTimber Harvesting Land Base

Pine

Vol

ume

Kill

ed (m

illio

ns o

f cub

ic m

eter

s