Hamir Patel Gabriel Nicholson

EQUITY RESEARCH
May 2, 2022 Earnings Update

WEST FRASER TIMBER CO. LTD.

Can’t Build Back Better Than This Outperformer
Our Conclusion WFG-TSX, Sector: Materials
Current Price (4/29/22): C$112.91
Reiterating our Outperformer rating on West Fraser and increasing our price up to
Price Target (12-18 mos.): C$146.00
target to C$146 (from C$126) on higher valuation parameters. As the largest
lumber and OSB producer, WFG is well-positioned to benefit from elevated Previous: C$126.00
U.S. housing starts (likely to persist at least through 2023). Further out, the
CIBC Estimates and Valuation
company’s strong balance sheet should support sustained large share
repurchase activity (even as commodity prices moderate), and provide the (Dec. 31) 2020 2021 2022 2023
Adj. EPS 6.76A 26.50A 26.72E 12.10E
company flexibility to consider additional product category opportunities with Prior 23.33E 10.17E
synergies to the existing platform (we believe NA siding market entry would Adj. EBITDA(mln) 933.0A 4,583.0A 4,148.0E 1,945.0E
make sense and/or entry into the European lumber market via acquisition). Prior 4,109.0E 1,962.0E

Key Points Adj. EPS Q1 Q2 Q3 Q4

2022 10.24A 5.97E 5.78E 4.73E
Replacement Valuation Increasingly Compelling: On a capacity basis, we Prior 9.01E 5.53E 4.86E 3.93E
2021 7.00A 12.41A 4.53A 2.57A
estimate West Fraser is trading at a ~35% discount to replacement value
(based on replacement costs for lumber of ~$800/mfbm and OSB/plywood Adj. EBITDA(mln) Q1 Q2 Q3 Q4
replacement costs of $600/msf). This ignores any value for the pulp mills or 2022 1,583.0A 985.7E 864.4E 715.2E
Prior 1,556.1E 993.3E 855.6E 704.1E
the lumber duties on deposit (~$700MM as of Q1). We also estimate that 2021 1,016.0A 2,177.0A 825.0A 565.0A
West Fraser is only trading at 4.9x mid-cycle EBITDA. This is below its 6.1x
historical average despite structural improvements to the lumber industry in Valuation 2020 2021 2022 2023
P/E 13.1x 3.3x 3.3x 7.3x
recent years (after permanent BC curtailments) and the acquisition of EV/EBITDA 8.3x 1.7x 1.9x 4.0x
Norbord in early 2021 (OSB equities have historically traded higher than
lumber). At the same time, our mid-cycle EBITDA estimate may be
conservative given the extreme highs seen this cycle, likely lumber industry
capacity curtailments in BC (from old-growth protection and further beetle Stock Performance and Key Indicators
impact) and the potential for sanctions on Russia to tighten global markets. Avg. Dly. Vol.: 601K Shares O/S: 103.4M
To put our mid-cycle EBITDA estimate on West Fraser (~$1.6 billion) in Market Cap.: C$11,675M Float: 86.7M
perspective, EBITDA in 2021 was ~$4.6 billion with only 11 months of 52-wk Range: C$84.14 - C$127.05 Div. / Yield: C$1.28/1.13%
Norbord and without much benefit from the Angelina/Allendale acquisitions.
New Res Demand For Wood Should Remain Strong Over 2022 Given TSX Composite Index vs. WFG-TSX
Builder Rate Locks: While we believe the dangers from a further material
rise in mortgage rates remains a major risk factor for the building products 140 24,000
complex in coming months, mortgage spreads over treasuries are likely to 105 20,500
narrow (currently ~50 bps wider than historical averages), commodity prices 70 17,000
have already found a near-term floor (at still elevated levels) and valuations
35 13,500
of wood equities remain compelling at these levels. At the same time, we
have become less concerned about the threat of rising homebuilder order 0 10,000
Nov-19

Nov-20

Nov-21
May-19

May-20

May-21

cancellations this year as builders have moved quickly to roll out extended
rate locks, which may secure most of their backlog into H1/23. Beyond that,
WFG-TSX Index
we continue to expect starts to moderate in 2023 to 1.55MM (latest print was
(Source: FactSet)
1.79MM), above the 50-year average (1.42MM) given pent-up demand.
While average monthly payments are up 40%-50% Y/Y with two years of
high-teen annual home price appreciation and a 235 bps increase in
mortgage rates since late December, we expect more inter-generational
wealth transfer to help offset some of the affordability headwinds. The Fed
estimates home equity levels are up ~$6.3 trillion over the past two years.

All figures in US dollars unless otherwise stated (C$1.278:US$1.00).

Please see "Price Target Calculation and Key Risks to Price Target" information on page(s) 5.
For required regulatory disclosures please refer to "Important Disclosures" beginning on page 6.
 Can’t Build Back Better Than This - May 2, 2022

West Fraser Timber Co. Ltd. (WFG-TSX) — Outperformer

Price (4/29/22) C$112.91 12-18 mo. Price Target C$146.00
Sector: Materials
Hamir Patel

Key Financial Metrics 2020 2021 2022E 2023E Company Profile

Tax Rate 26% 24% 28% 32%
West Fraser is North America's largest lumber producer (7.0
Net Debt 47 (1,069) (1,200) (1,262)
Total Debt 508 499 510 516 Bbf/yr of capacity), NA's largest OSB producer (~31% share),
Net Debt To Cap 1.9% (13.1%) (14.2%) (15.3%) Europe's 3rd largest OSB producer (~12% share), the largest
Net Debt/EBITDA 0.1x (0.2x) (0.3x) (0.6x) producer of plywood in Canada (860 mmsf/yr) and the third
Operating FCF 806 3,262 2,537 1,034
largest pulp producer in Canada. The company's Pulp & Paper
Per Share Data 2020 2021 2022E 2023E segment includes softwood pulp capacity (400K mtpy), BCTMP
BVPS 36.08 70.23 88.25 105.15
FCFPS 11.41 27.99 26.15 16.31
(690K mtpy) and newsprint (135K mtpy).
EPS 8.53 26.90 27.69 12.09
Investment Thesis
Adj. EPS Dil. 6.76 26.50 26.72 12.10
Wgt Avg # of Shares 68.9 109.6 90.6 73.8 West Fraser has significant leverage to stronger global lumber
Dividends per Share 0.60 0.76 1.00 1.12 and OSB prices, supported by elevated U.S. housing starts over
Income Statement 2020 2021 2022E 2023E the next two years, as well as continued healthy R&R
Revenue 4,376 10,518 10,508 8,162 consumption.
Cost of Goods Sold 3,092 5,491 5,882 5,797
SG&A 185 312 327 299 Price Target (Base Case): C$146.00
Adj. EBITDA 933 4,583 4,148 1,945 Our C$146/share price target is based on sum-of-the-parts
Adj EBITDA Margin 21.3% 43.6% 39.5% 23.8% multiples (2023E EV/EBITDA), plus the value of West Fraser's
thereof Depreciation 203 584 622 626
EBIT 830 3,945 3,528 1,320
forecasted net cash position. We apply 4.25x for lumber, 4.0x for
Interest Expense (27) (45) (23) (8) NA and European engineered wood, and 4.0x for pulp & paper.
Pretax profit 789 3,898 3,505 1,312 Our target equates to ~5.0x mid-cycle EBITDA ($1,575MM).
Adjusted Net Income 466 2,961 2,499 892
Cash Flow Statement 2020 2021 2022E 2023E
Upside Scenario: C$168.00
CFO pre Chg in NWC 986 3,621 3,087 1,584 Our upside scenario is derived using bull-case lumber and OSB
Net CFO 966 3,552 2,938 1,752 pricing scenarios in 2023E (W. SPF at $625/mfbm, SYP at
Capex 180 359 550 550 $600/mfbm and OSB North Central at $485/msf). In this scenario,
Net CFI (166) (286) (549) (550)
Net CFF (349) (2,166) (2,241) (1,135)
we see upside 2023E EBITDA of $2,791MM. With wood products
Free Cash Flow 787 3,193 2,388 1,202 prices here above mid-cycle levels, we utlitize lumber/OSB
Balance Sheet 2020 2021 2022E 2023E
segment valuation multiples of 3.5x/3.25x in this scenario.
Cash & ST Investment 461 1,568 1,710 1,778
Shareholders' Equity 2,478 7,656 7,959 7,719
Downside Scenario: C$87.00
Our downside scenario is derived using our bear case lumber
Segm ent Data ($MM) 2020 2021 2022E 2023E and OSB pricing in 2023E (W. SPF at $475/mfbm, SYP at
Lumber EBITDA 835 1,988 1,822 669 $485/mfbm and OSB North Central at $365/msf). In this scenario,
NA EWP EBITDA 101 2,414 2,117 1,084 we see downside 2023E EBITDA of $1,271MM. We also
Europe EWP EBITDA ---- 201 220 191
Pulp & Paper EBITDA (1) 15 12 21 moderate our lumber multiple to 3.5x and OSB multiple to 3.25x.
Other EBITDA (2) (34) (23) (20)
Adjusted EBITDA 933 4,583 4,148 1,945 Scenario Analysis:

Key Assum ptions 2020 2021 2022E 2023E C$180 Upside Scenario
Shipm ents (m m fbm ) C$168 (+50%)
C$160
SPF lumber 3,214 3,176 2,919 3,050
SYP lumber 2,861 2,649 3,135 3,450 C$140
Total lumber 6,075 5,825 6,054 6,500 Price Target
C$146 (+31%)
OSB (mmsf) ---- 5,674 6,254 6,719 C$120
European Panels (mmsf) ---- 1,716 1,971 2,350
C$100
Plyw ood (mmsf) 763 756 753 800
Pulp (000 tonnes) 1,132 1,033 1,007 960 C$80 Downside Scenario
C$87 (-22%)
Key Prices
Lumber mill net [US$/mfbm] $430 $687 $658 $429 C$60
North Central OSB (7/16") [$/msf] $439 $812 $740 $425
C$40
Plyw ood Toronto (3/8") [C$/msf] $591 $986 $889 $700
BCTMP (delivered) [US$/tonne] $462 $529 $621 $560 C$20
NBSK (delivered) [US$/tonne] $594 $843 $888 $740 Apr-20 Oct-20 Apr-21 Oct-21 Apr-22 Oct-22 Apr-23

Long-term Forecast 2024E Mid-Cycle

Adjusted EPS (FD) [$/sh] $10.37 $11.49
Adjusted EBITDA ($MM) $1,582 $1,575

So urce: Co mpany repo rts, FactSet and CIB C Wo rld M arkets Inc.

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Conference Call Exhibit 1: West Fraser – Quarterly Results, Q1/21 – Q1/22

Takeaways: On the lumber
$MM (unless otherwise stated) Q1/22E
side, after a short-lived
Q1/22 Q4/21 % Δ Q/Q CIBC est. Q1/22 Q1/21 % Δ Y /Y
correction, West Fraser has Lumber EBITDA 787 190 n.m. 707 787 654 20%
seen R&R (and specifically Engineered Wood (OSB/Plywood) EBITDA 808 404 n.m. 869 808 364 n.m.
box store) demand rebound Pulp & Paper EBITDA (15) (14) 7% (11) (15) 11 n.m.
over the last few weeks. Other EBITDA 3 (15) n.m. (9) 3 (13) n.m.
Demand from treaters in the Adjusted EBITDA $1,583 $565 n.m. $1,556 $1,583 $1,016 56%
south remains subdued.
New home construction Adjusted EBITDA margins
demand for lumber Lumber 52% 21% n.m. 47% 52% 50% 212 bps

remained strong throughout Engineered Wood (OSB/Plywood) 55% 40% 1573 bps 59% 55% 41% 1466 bps
Pulp & Paper -9% -9% 3 bps -7% -9% 6% n.m.
Q1.
Total 51% 28% 2318 bps 50% 51% 43% 754 bps

On the OSB side, while the

Shipments
company has yet to see a
SPF lumber [mmfbm] 619 673 -8% 681 619 748 -17%
significant uptick in SYP lumber [mmfbm] 750 632 19% 695 750 641 17%
European OSB prices since Total lumber [mmfbm] 1,369 1,305 5% 1,376 1,369 1,389 -1%
the war in Ukraine began,
OSB [mmsf] 1,429 1,543 -7% 1,450 1,429 1,010 41%
West Fraser is seeing
European panels [CIBCe] [mmsf] 508 364 40% 488 508 360 41%
steady demand for its panel Plywood [mmsf] 167 190 -12% 170 167 191 -13%
products on the continent.
Pulp [000 tonnes] 239 231 3% 205 239 276 -13%

While transportation
Pric ing
problems continue, West Lumber mill net (WFG) [$/mfbm] $941 $569 65% $899 $941 $775 21%
Fraser noted that the Random Lengths Lumber Composite [$/mfbm] $1,248 $677 84% $1,248 $978 28%
situation is improving. W. SPF #2&Btr 2x4 lumber [$/mfbm] $1,287 $714 80% $1,287 $971 33%
SYP 2x4 West lumber [$/mfbm] $1,425 $795 79% $1,425 $1,154 23%
For additional details on the North Central OSB (7/16") [$/msf] $1,085 $532 n.m. $1,085 $837 30%
quarter, please see our Plywood Toronto (3/8") - delivered [C$/msf] $1,075 $634 70% $1,075 $1,041 3%
Q1/22 First Glance note.
BCTMP China [$/tonne] $620 $495 25% $620 $550 13%
NBSK China [$/tonne] $900 $733 23% $900 $867 4%

Source: Company reports and CIBC World Markets Inc.

Exhibit 2: West Fraser – Sector Relative Total Returns During Prior Rate Hike Cycles, 1994 To Present
Period Trough Peak Inc rease Relative Performanc e V s. S&P 500 Builder Avg
Trough Peak (W eeks) Rate Rate bps W FG CFP IFP LPX WY DHI,LEN,PHM
Feb-94 Nov-94 41 6.97% 9.25% 228 -8% -7% -40% -36% -17% -35%
Feb-96 Jul-96 21 6.94% 8.42% 148 16% -9% -14% -10% -5% -16%
Jan-99 Feb-00 55 6.74% 8.38% 164 0% 231% 27% -46% -6% -52%
Jun-03 Sep-03 12 5.21% 6.44% 123 8% 30% 3% 30% 17% -5%
Jun-05 Jul-06 53 5.53% 6.79% 126 -26% -19% -4% -16% -10% -39%
Jan-08 Jul-08 26 5.48% 6.63% 115 7% -22% -3% -21% -13% 7%
Nov-12 Aug-13 39 3.31% 4.58% 127 14% 22% 60% -26% -13% -21%
Nov-17 Nov-18 53 3.90% 4.94% 104 -23% -32% -39% -16% -28% -27%

Avg 38 142 -1% 24% -1% -18% -9% -24%

Dec-21 Apr-22 18 3.05% 5.40% 235 11% -3% 18% 0% 22% -17%

Source: FactSet, Freddie Mac and CIBC World Markets Inc.

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Price Target Calculation

Our C$146/share price target is based on sum-of-the-parts multiples (2023E EV/EBITDA),
plus the value of West Fraser's forecasted net cash position. We apply 4.25x for lumber, 4.0x
for NA and European engineered wood, and 4.0x for pulp & paper. Our target equates to
~5.0x mid-cycle EBITDA ($1,575MM).

Key Risks To Price Target

Weaker Wood Product Prices: A slowdown in the pace of the U.S. housing recovery and/or
excess lumber/OSB industry capacity additions could lead to weaker industry operating rates.

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Important Disclosures
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CIBC World Markets Inc. Stock Rating System

Stock Ratings Abbreviation Description
Outperformer OP Stock is expected to outperform similar stocks in the coverage universe during the next 12-18 months.
Neutral NT Stock is expected to perform in line with similar stocks in the coverage universe during the next 12-18 months.
Underperformer UN Stock is expected to underperform similar stocks in the coverage universe during the next 12-18 months.
Tender TR Shareholders are advised to tender shares to a specific offer as we do not believe a superior offer will materialize.
Not Rated NR CIBC World Markets does not maintain an investment recommendation on the stock.
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Sector Ratings Abbreviation Description

Overweight O Sector is expected to outperform the broader market averages.
Marketweight M Sector is expected to equal the performance of the broader market averages.
Underweight U Sector is expected to underperform the broader market averages.
None NA Sector rating is not applicable.
Note: Broader market averages refer to S&P 500 in the U.S. and S&P/TSX Composite in Canada.

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Can’t Build Back Better Than This - May 2, 2022

CIBC World Markets Inc. Price Chart

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Important Disclosure Footnotes for West Fraser Timber Co. Ltd. (WFG.TO)
 2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from
these companies in the next 3 months: West Fraser Timber Co. Ltd.
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Ratings Distribution*: CIBC World Markets Inc. Coverage Universe

(as of 02 May 2022) Count Percent Inv. Banking Relationships Count Percent
Outperformer 179 58.1% Outperformer 179 100.0%
Neutral 119 38.6% Neutral 118 99.2%
Underperformer 8 2.6% Underperformer 8 100.0%
Tender 2 0.6% Tender 2 100.0%
Restricted 3 1.0% Restricted 3 100.0%
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