Canfor Earnings: Higher Interest Rates Constrain Near-Term Lumber Demand, but Shares Look Cheap

No-moat-rated Canfor Corporation CFP reported lackluster operating results for the third quarter. Net sales fell 21% year over year as lumber markets remain pressured amid a slowdown in new residential construction. Canfor’s operating results were also constrained by persistent weakness in its pulp and paper business during the quarter. Despite some marginal improvements, we expect lumber markets to remain pressured for much of next year as higher interest rates constrain new residential construction and freeze existing home sales. As such, we maintain our CAD 27 fair value estimate.

Canfor’s lumber business reported underwhelming results as net sales declined 17% year over year due to lower prices and a pullback in shipments. Wildfires and market curtailments constrained supply early in the quarter, but much of this dissipated rather quickly as the quarter progressed, which weighed on lumber prices. The segment reported a CAD 1.3 million operating loss, which was an improvement from the CAD 15 million loss last quarter. Lumber markets remain constrained, and curtailments have offered little respite for lumber prices. While we expect Canfor will benefit from its own curtailments, we forecast the lumber segment will report a full-year operating loss.

The pulp and paper business continued to struggle amid a challenging operating environment with net sales tumbling almost 39% year over year. The segment also reported a CAD 49 million operating loss in the quarter and is on pace to lose over CAD 100 million for the full year. If that were the case, it would mark five consecutive years of operating losses for the pulp and paper business. Both shipments and prices were down year over year as inventory destocking and weakness in China stifled demand. Management noted that lower prices toward the end of the quarter spurred a pickup in buying activity, but we expect the pulp and paper business will be affected by inventory destocking and lower prices through much of next year.