Housing Demand And Trade Pressures Will Shape Lumber Margins Over The Long Term

Catalysts

About Interfor

Interfor is a North American lumber producer with a diversified mill base and product mix serving residential, industrial and repair and remodel markets.

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

• Although pent up North American housing demand and expected improvements in affordability from 2026 could support a gradual recovery in lumber pricing, the timing and strength of that recovery remain uncertain. This may limit a meaningful rebound in revenue growth and delay operating leverage.
• Despite disciplined production curtailments and portfolio optimization aimed at keeping mills in the top quartile on costs, prolonged weak pricing and higher duty and tariff burdens on Canadian shipments could erode cost advantages and compress EBITDA margins if low demand persists longer than expected.
• While Interfor’s geographically diverse platform across Canada and the U.S. is positioned to capture upside as trade actions shift imports and favor North American production, further escalation or expansion of trade measures could increase compliance costs and volatility in realized prices. This could weigh on net margins.
• Although the strengthened balance sheet from the recent equity raise and renewed credit facility provides flexibility to invest through the downturn, sustained negative cash margins on lumber sales and continued capital spending could constrain future shareholder returns and depress earnings growth.
• While ongoing cost reduction and product mix initiatives, including higher value engineered wood and specialty products, aim to support industry leading margins during the next upcycle, execution risk and potential additional goodwill impairments could dampen the benefit of these initiatives on long term earnings and book value.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Interfor compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Interfor's revenue will grow by 5.6% annually over the next 3 years.
• The bearish analysts are not forecasting that Interfor will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Interfor's profit margin will increase from -13.7% to the average CA Forestry industry of 12.8% in 3 years.
• If Interfor's profit margin were to converge on the industry average, you could expect earnings to reach CA$410.4 million (and earnings per share of CA$5.09) by about June 2029, up from -CA$372.6 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 2.6x on those 2029 earnings, up from -2.1x today. This future PE is lower than the current PE for the CA Forestry industry at 11.4x.
• The bearish 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 9.63%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A sustained recovery in North American housing affordability and pent-up demand from 2026 onward could trigger a stronger than expected rebound in lumber prices, leading to higher shipment volumes and materially improving revenue and earnings over the medium term.
• Interfor’s cost and supply discipline, including proactive curtailments and a portfolio optimized for top quartile EBITDA margins, may allow it to expand net margins significantly once prices normalize, supporting a higher valuation and rising earnings.
• The company’s strengthened balance sheet following the equity raise and renewed credit facility provides flexibility to invest through the downturn, which could position Interfor to capture share and drive faster earnings growth and improved net margins when markets turn.
• Interfor’s geographically diverse operations, secure fiber tenure in modernized B.C. mills and growing advantages versus higher cost or tariff impacted imports may enhance its competitive position, supporting long-term revenue growth and structurally higher EBITDA margins.

Valuation

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

• The assumed bearish price target for Interfor is CA$10.0, which represents up to two standard deviations below the consensus price target of CA$12.75. 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 more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$16.0, and the most bearish reporting a price target of just CA$10.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be CA$3.2 billion, earnings will come to CA$410.4 million, and it would be trading on a PE ratio of 2.6x, assuming you use a discount rate of 9.6%.
• Given the current share price of CA$12.06, the analyst price target of CA$10.0 is 20.6% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• 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.