Canfor Earnings: Weak Lumber Markets Weigh on Results, but Shares Look Cheap

No-moat-rated Canfor CFP reported second-quarter earnings that were largely in line with our expectations. Revenue declined roughly 33% year over year on lower lumber prices and weak pulp demand. Canfor reported an almost CAD 67 million operating loss in the quarter, a significant decrease year over year but an improvement sequentially. Additionally, Canfor’s lumber business continued to be affected by high operating costs in British Columbia that lower lumber prices have exacerbated. Nevertheless, we maintain our CAD 27 fair value estimate.

Canfor’s lumber business reported few surprises in the quarter, with revenue falling 36% year over year while posting a small operating loss. A slight uptick in new residential construction in the U.S. provided some relief for lumber volumes but given the current operating environment, we anticipate Canfor’s lumber business will remain pressured through the end of the year and will likely post a full-year operating loss for 2023. That said, the recent closures of two plants should provide some relief for operating costs in the second half of the year. Canfor’s pulp and paper segment reported an underwhelming quarter, as a 14% decrease in revenue was met with a CAD 38 million operating loss. Pulp prices declined heavily during the quarter, and demand continued to face pressure amid inventory management initiatives from customers. Canfor closed its Prince George pulp and paper plant in the beginning of April as availability of fiber in the region has decreased.

During the quarter, Canfor continued to reevaluate its manufacturing footprint after closing its Chetwynd plant last quarter and announced the temporary closure of its Houston facility. Challenging market conditions and lower lumber prices have weighed heavily on the company in the first half of the year. While new residential construction has provided slight relief, we expect lumber markets will remain pressured through the end of the year.