Weyerhaeuser Upgrades to Sector Perform

Weyerhaeuser is maintaining its $18 target and believes it will attract interest from investors at this level due to its significant asset value and yield.  Recovery in the US housing market is still a long way off, but growing Asian log and lumber exports are positive – so their outlook remains cautious.

Weyerhaeuser stock is trading at a 35% discount to their NAV estimate of $26 – this was reviewed based on their current balance sheet and updated asset values. As a result, it was previously increased from $24/share.

NAV estimate is Very Sensitive to Timberland values – their high and low valuation range was determined from 2007 – 2011 values. On Weyerhaeuser's Washington and Oregon timberlands (PNW) they used a range of $2,100/acre to $3,500/acre. In the US South, the range used was $1,200/acre to $1,800/acre.

In Quarter 3, the company is expecting significantly lower earnings for timberlands, but significantly higher earnings for Cellulose Fibres. The loss in Wood Products is expected to be similar to Quarter 2 while management believes Real Estate earnings will be a little higher.

Using mid-cycle pricing and cost assumptions, the trend EBITDA estimate for Weyerhaeuser remains at $2.125 billion. They are currently well below this level of performance with an EBITDA forecast of only $956 million in 2011 and $1,226 million in 2012. The $18 target price is based on a blended 6.7x EV/EBITDA multiple on their trend EBITDA forecast of $2.125B (85%) and the revised 2012 EBITDA forecast of $1,226 million.

Their target price is based on a blended 6.7x EV/EBITDA multiple on Weyerhaeuser’s trend EBITDA forecast of $2.125B (85%) and their revised 2012 EBITDA forecast of $1,226 million. Their near-term valuation metric has been rolled forward to 2012.

The primary risks to their forecasting accuracy include…

• the rebound in US housing market - If new home building activity is lower than expected we would see a reduction in demand for Weyerhaeuser's wood, timberland and real estate products which would contribute to higher fibre prices for pulp and paper.
• the timing of the overall economic recovery - If the economic recovery is slower than anticipated there would be a reduced demand for Weyerhaeuser's primary products as well as a fall in prices which would result in below forecasted levels in both domestic and export markets.  
• the impact of changes in timberland valuation.

Any delay in converting to a more tax efficient structure would sorely disappoint investors and if timberland values fall more to a greater degree than is expected declines in timberland values would lower Weyerhaeuser's NAV.

Posted Date: 12th Aug 2011