Mass Timber Industry: Impressions

[jks327]

ATM a thesis without a business, figured would post it here:

 

Within forest products, the lumber industry has seen declining growth rates the past few years while the mass timber industry is projected to grow at around a 12% CAGR between now and 2027.  Modernization of building codes to allow for a wider range of mass timber buildings will enhance this even further.  Data suggest the material has good ability to withstand fire and retain its structural integrity, it has performed well in simulated seismic events, and can be produced with a lower carbon footprint than most steel and concrete.  The CLT (cross-laminated timber) segment offers designers the greatest freedom; since the pieces are laminated together in layers with opposing grain directions, it can handle stress on multiple axes.  In the industry today there are a number of lumber businesses starting to develop their mass timber capability.  I believe there will be a difference in valuation between a lumber company (mature business) and a mass timber company (new business, potential growth).  In the long term it should be considered reasonable to value a good mass timber business at the industry average of around 10x earnings.  At the present, many are trading below this multiple.  What I’m looking for today is a mass timber company with solid fundamentals being valued as a lumber company.  I hope that my search will be fruitful and look forward to sharing my results.

[Castanza]

@Viking has done some really solid work on West Fraser Group here. LVL and engineered products make up a percentage of their product line. Trading around 8x right now. I posted a Morningstar link in the "What Is The Short The Homebuilder Thesis" thread yesterday. Not sure if this is what you're after but it's a very well run company with a solid management team that has been executing very well the past few years. They have acquired a few key pieces the past few years that have given them a significant position in the industry. 

 

https://thecobf.com/forum/topic/15893-wfg-west-fraser-timber/page/3/

 

 

[Spooky]

I've been following WFG a little bit here and there, is the price attractive now? It seems like they have a lot going for them in terms of the macro set-up: 1) shortage of housing that needs to be built; 2) increasing use / demand for timber in construction; 3) less competition from Russia; 4) alternative timber products as mentioned above; 5) ESG rules potentially limiting supply.

 

[yesman182]

One way to play growth in mass timber would be to invest in simpson strong tie. No mater who makes the lumber you will use either simpson or mitek hardware. I think simpson is the leader in the space. 

[Castanza]

18 hours ago, Spooky said:

I've been following WFG a little bit here and there, is the price attractive now? It seems like they have a lot going for them in terms of the macro set-up: 1) shortage of housing that needs to be built; 2) increasing use / demand for timber in construction; 3) less competition from Russia; 4) alternative timber products as mentioned above; 5) ESG rules potentially limiting supply.

 

 

I've been a net buyer in the low 70's which it seems to touch regularly. But pending what you think regarding a recession this could be a good or bad price in the short term. So my approach is add in small amounts now in the low 70's but plan on adding heavily if this dips in any significant manner pending a recession etc. 

[jks327]

On 6/15/2023 at 2:41 PM, Spooky said:

I've been following WFG a little bit here and there, is the price attractive now? It seems like they have a lot going for them in terms of the macro set-up: 1) shortage of housing that needs to be built; 2) increasing use / demand for timber in construction; 3) less competition from Russia; 4) alternative timber products as mentioned above; 5) ESG rules potentially limiting supply.

 

 

Have been looking at this too, looks cheap at the present.  They are in LVL residential beams, have seen some new construction using them as joists.  Story Enso seems like they cover the whole market but this is an OTC stock, I emailed them asking for past years' earnings, haven't heard back yet; wasn't getting it on my terminal and sometimes is inaccurate.

 

Yesman, great comment about the hardware, will be looking into this.  Thanks to all who responded!

[Castanza]

On 6/17/2023 at 6:41 PM, jks327 said:

 

Have been looking at this too, looks cheap at the present.  They are in LVL residential beams, have seen some new construction using them as joists.  Story Enso seems like they cover the whole market but this is an OTC stock, I emailed them asking for past years' earnings, haven't heard back yet; wasn't getting it on my terminal and sometimes is inaccurate.

 

Yesman, great comment about the hardware, will be looking into this.  Thanks to all who responded!

 

What?

 

https://www.westfraser.com/investors/stock-information

[gfp]

9 minutes ago, Castanza said:

 

What?

 

https://www.westfraser.com/investors/stock-information

 

I think they were referring to Stora Enso on the OTC thing.  They aren't OTC in their native country - just go to their website to read their earnings results:

https://www.storaenso.com/en/investors

https://www.storaenso.com/en/investors/reports-and-presentations

 

( @jks327 )

 

Edited June 19, 2023 by gfp

[Viking]

Mass timber certainly looks like a solid future opportunity. I think it will take many years to play out (10 or more years). In terms of who the players are today, i am not sure. I follow the 800 pound lumber giants but not the smaller niche players.

 

in terms of lumber, i think the secular story has not changed; if anything it is getting stronger. We are short housing stock in North America. Given high interest rates, we are once again under-building. So the supply shortfall is increasing. High interest rates is slowing demand in the short term - like it is supposed to. 
 

My guess is once we get to the next economic expansion, housing is going to be one of the big engines of growth for the economy. Just like the big boom 2 year ago, lumber remains structurally challenged. Supply of lumber in BC will continue to shrink for the next 5 years at least (as the allowable cut shrinks due to mountain pine beetle infestation; provincial government is also toxic to big forest companies). Yes, we will see continued growth out of US South. But if US housing starts pop over 1.6 million i think we will once again have a very tight lumber market. Throw in record levels of forest fires for a few years… BC is tracking to have a record level of forest fires this year.  Same in Alberta. And smoke from forest fires in Eastern Canada is causing issues in Eastern US. The risks are skewed towards lower supply. (I need to understand better what is going on with Russian production and supply/demand for Europe…)

 

i am a little surprised we are not seeing more consolidation right now. West Fraser has a pristine balance sheet (net cash of $800 million I think). They have the financial ability to make their next big transformative acquisition. I am wondering if their next big move is Europe. I think Canfor also has the cash to make a big purchase. Both West Fraser and Canfor (and privately held Tolko) need to continue to diversify away from BC; they are impacted the most from the pine beetle). The problem, of course, is price. Obviously, the sellers see the same thing i do - a big rebound in lumber prices in another year or two. Why sell on the cheap today?

 

Right now i am playing around a little with Interfor (small trades). Buy close to C$20 and sell for small gains.

 

I wonder if inflation does not remain sticky (3.5 to 4%). I see the risk to the economy as being to the downside over the next 6 months. I suspect, at some point, higher interest rates, QT and tightening credit conditions will work their black magic. Or perhaps we continue to muddle along like we currently are. Not high conviction. Lumber stocks are on my watchlist.

Edited June 19, 2023 by Viking