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

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CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

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CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012 . Presentation Highlights . $14.41. Overview. Competitive Advantages. Financial Analysis. Rising Lumber Prices. Valuation. $11.70. Risks. Increasing Lumber Demand. Company Overview. - PowerPoint PPT Presentation

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Page 1: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

CANFOR CORPORATIONUniversity of Victoria Student ResearchCFA Institute Research Challenge 2012

Page 2: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Presentation Highlights

Overview

Financial Analysis

Valuation

Risks

Increasing Lumber Demand

Rising Lumber Prices

Competitive Advantages

$14.41

$11.70

Page 3: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

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

Page 4: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Overview

Financial Analysis

Valuation

Risks

Company Overview: Major Markets

Source: FAOSTAT

Page 5: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

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

Page 6: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Industry Overview: Harvesting Restrictions in China

Overview

Financial Analysis

Valuation

Risks

Restricted

Page 7: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Industry Overview: Growing Supply Gap in China

Overview

Financial Analysis

Valuation

Risks

Sawnwood Lumber Exports to China (MM Board Feet)

Page 8: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Overview

Financial Analysis

Valuation

Risks

Competitive Positioning: ChinaCompetitive Positioning: North America

Page 9: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

FINANCIAL ANALYSIS

Page 10: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Financial Analysis: Return On Equity

Overview

Financial Analysis

Valuation

Risks

Page 11: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

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

Page 12: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

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

Page 13: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

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

Page 14: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

VALUATION

Page 15: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

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

Page 16: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Discounted Cash Flow: Asset Proportions

Overview

Financial Analysis

Valuation

Risks

Page 17: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

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%

Page 18: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

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

Page 19: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Multiple Analysis: Similarity Assessment

Overview

Financial Analysis

Valuation

Risks

Page 20: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

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

Page 21: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

EBITDA Regression: Variables

Overview

Financial Analysis

Valuation

Risks

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

EBITDA Mean: $171 Million

Page 22: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

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

Page 23: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

RISKS

Page 24: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

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)

Page 25: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

BUYQUESTIONS?Rising Lumber Demand

Growing Lumber Prices

Strong Competitive Positioning

Page 26: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Appendix A: Financials

Page 27: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Appendix B: Financials

Page 28: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Appendix C: Financials

Page 29: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Appendix D: Financials

Page 30: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Appendix E: FCFE Sensitivity Analysis

Page 31: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Appendix F: DCF Inputs

Page 32: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Appendix G: Comparables

Page 33: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Appendix H: Company Similarity

Page 34: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Appendix I: Comparable Fundamentals

Page 35: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Appendix J: Applied Ratios

Page 36: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Appendix K:Regression Variables

Page 37: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Appendix L: Exchange Rates

Page 38: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Appendix M: Management Change

Page 39: CANFOR CORPORATION University of Victoria Student Research CFA Institute Research Challenge 2012

Appendix N: Mountain Pine Beetle

Entire ProvinceTimber Harvesting Land Base

Pine

Vol

ume

Kill

ed (m

illio

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f cub

ic m

eter

s