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B.C. lumber giant ‘a cash-generation story’

Investors are betting on increased demand for lumber and specialty wood products used in home renovation to fire up the shares of Western Forest Products Inc., the largest lumber producer on the B.C. coast.


Investors are betting on increased demand for lumber and specialty wood products used in home renovation to fire up the shares of Western Forest Products Inc., the largest lumber producer on the B.C. coast.

Western's shares are trading at multiyear highs and have increased almost 50 per cent over the past year, outpacing its industry peers.

The Vancouver-based company is benefiting from a recovery in the U.S. housing market, higher lumber and log prices, and growing demand for its specialty wood used for home renovation.

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All six analysts who cover the company have a "buy" or equivalent rating on the stock, noting Western trades at a discount to its rivals and has a greater mix of products and markets.

"Western is more of a diversified lumber play," says CIBC World Markets analysts Mark Kennedy, who has a $3 target on the stock, which is almost a 40-per-cent gain from where it's now trading.

Mr. Kennedy also likes that Western is focused on supplying lumber from the B.C. coast, and not buying assets in other markets.

"It's a company that is going to stick to its knitting, and therefore is more of a cash-generation story," said Mr. Kennedy.

The company initiated a two-cents-per-quarter dividend last fall, which currently yields about 3.7 per cent.

RBC Securities analyst Paul Quinn has a $3 target on the stock, expecting future growth to come from a strengthening U.S. housing market, increased demand for B.C. coastal wood in Asia and cost-cutting efforts that help to boost margins.

"It's a good little story. It's different than the others. It's a lot more stable," Mr. Quinn said. "They are doing the right things in terms of spending and allocating capital. As a result [the stock] has performed well."

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The stock hit a nine-year high of $2.68 in February, after the company reported a huge jump in both fourth-quarter and year-over-year sales and profits.

The shares are up from a 52-week low of $1.34 in October, after the company said its largest shareholder, a subsidiary of Brookfield Asset Management, sold off another chunk of the stock. Brookfield, which now owns about a third of Western shares, down from 87 per cent in late 2012, has been slowly selling its holdings after harvesting huge gains when it loaded up on the stock cheaply during the 2008-09 housing crisis.

Western's shares fell below 20 cents during the economic downturn, plummeting alongside other forestry stocks. Its shares have since climbed about 1,400 per cent.

Western operates eight sawmills on Vancouver Island and two manufacturing facilities, which produce lumber for home construction and millwork. Its timber resources include hemlock, Douglas fir and western red cedar.

About 34 per cent of its revenues are from products are sold within Canada, 21 per cent in China, 20 per cent in Japan, 14 per cent in the United States and the rest in Europe and other locations.

The company is scheduled to release its second-quarter earnings on July 30, which will be affected by higher log inventories and the effects a dock strike at the Port of Vancouver in the first quarter, which disrupted deliveries. Production was also halted for at least a day at its mills after two employees were shot dead and two wounded at its Nanaimo location on April 30.

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Analysts are expecting second-quarter EBITDA (earnings before interest, taxes, depreciation, and amortization) to come in at $36.4-million, according to S&P Capital IQ. That's up from $32.8-million in the first quarter but down from $44.9-million in the second quarter of 2013, which the company said at the time was "a historic high."

Risks for the company, and other lumber producers, include slower recovery of the U.S. housing market and lower demand in Asia

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