Housing Recovery And Supply Tightening Will Drive A Powerful Lumber Upswing

Catalysts

About Interfor

Interfor is a major North American lumber producer with a diversified, modern mill network and engineered wood capabilities.

What are the underlying business or industry changes driving this perspective?

• Anticipated recovery in North American housing affordability starting in 2026, combined with years of pent up housing demand, is expected to drive a multiyear rebound in lumber consumption that could lift Interfor's revenue and support higher earnings.
• Industry wide production curtailments and capacity rationalization, including permanent closures in higher cost regions, are expected to tighten supply over time and improve pricing power for Interfor's low cost, top quartile mills, which could expand net margins.
• Interfor's geographically diverse platform across Canada and the U.S., with secure fiber tenure and an advantaged product mix, is positioned to capture share as trade barriers and new import tariffs on European lumber favor North American producers, supporting both volumes and revenue growth.
• Ongoing portfolio optimization, including the divestiture of less strategic assets, a focus on high return mills and continued cost initiatives across offices, mills, Woodlands and sales, is expected to reduce unit costs on a structural basis and enhance EBITDA margins when prices normalize.
• A strengthened balance sheet following the equity raise and renewed credit facility provides additional financial flexibility to sustain disciplined curtailments during the downturn, preserve strategic assets and selectively invest in high return projects that may support earnings growth in the next upcycle.

Assumptions

This narrative explores a more optimistic perspective on Interfor compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Interfor's revenue will grow by 7.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -9.8% today to 1.3% in 3 years time.
• The bullish analysts expect earnings to reach CA$46.1 million (and earnings per share of CA$2.37) by about December 2028, up from CA$-289.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 36.0x on those 2028 earnings, up from -1.9x today. This future PE is greater than the current PE for the CA Forestry industry at 16.8x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.17%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A prolonged period of weak lumber prices driven by ongoing economic uncertainty, low consumer sentiment and elevated mortgage rates could persist well beyond 2026, suppressing housing starts and repair and remodel activity. This would limit any recovery in Interfor's revenue and delay a return to positive earnings.
• Escalating and sustained trade actions by the U.S., including the recent increase in combined antidumping and countervailing duties on Canadian lumber from 14.4% to over 35% and the additional 10% Section 232 tariff, may structurally impair the competitiveness of a quarter of Interfor's shipments, compressing net margins and pressuring earnings even if volumes normalize.
• If industry wide curtailments and Interfor's own production cuts fail to fully rebalance supply with structurally weaker demand, the company could be forced into more frequent or deeper curtailments or permanent closures. This would reduce operating leverage and scale benefits, keeping production costs per unit elevated and weighing on EBITDA margins.
• Should the housing recovery be weaker or slower than management anticipates, the combination of negative cash margins, ongoing capital expenditure needs and reliance on asset sales and equity issuance could erode the strengthened balance sheet over time. This would increase leverage risk and constrain the company’s ability to invest for growth, limiting long term earnings power.
• If long term trend lumber prices or cash flow expectations used in goodwill testing decline due to a structurally less profitable industry, Interfor could face material goodwill impairments that signal lower underlying asset returns. This would reflect weaker profitability prospects and diminish confidence in future earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Interfor is CA$15.0, which represents up to two standard deviations above the consensus price target of CA$11.83. This valuation is based on what can be assumed as the expectations of Interfor's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$15.0, and the most bearish reporting a price target of just CA$8.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be CA$3.7 billion, earnings will come to CA$46.1 million, and it would be trading on a PE ratio of 36.0x, assuming you use a discount rate of 11.2%.
  
• Given the current share price of CA$8.3, the analyst price target of CA$15.0 is 44.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.