West Fraser’s Q4 Affected by Normalizing Demand, Low Lumber Prices

No-moat-rated West Fraser WFG reported fourth-quarter results that were largely in line with our expectations. Lower lumber prices and softening housing demand in the United States led to a decline in West Fraser’s financial results. Revenue declined 21% year over year, with all three wood products segments posting double-digit declines. West Fraser posted a $130 million operating loss in the quarter, largely due to lower lumber prices and slowing housing demand. While raw material cost inflation continues to moderate, rising operating costs weighed on results.

West Fraser’s lumber business reported a 21% decrease in revenue year over year, while the segment posted a $160 million operating loss. Higher mortgage rates in the U.S. continue to pressure new-home construction and housing affordability, which has negatively affected lumber demand and pricing. While repair and remodel demand has remained relatively stable, it was not enough to offset falling housing demand in the quarter. The North American engineered wood products segment saw similar trends in the quarter, with revenue decreasing almost 27% year over year. We expect the EWP segment to see similar declines in volume and price as the lumber business during the year as lower new-home construction weighs on demand.

While lumber prices remained low during the quarter, they slightly rebounded to start the first quarter of 2023. Capacity curtailments announced by West Fraser and some competitors in the second half of 2022 have moderated supply and relieved some pressure on lumber prices. That said, we expect the benefit of reduced capacity to be somewhat offset by soft housing demand, which should keep lumber prices at lower levels for much of 2023. We’ve decreased our fair value estimate to $104/CAD 139 per share from $110/CAD 150 due to lower near-term revenue growth and profitability in our forecast.