4Q 2023 Macro and Timber Equities Update

Macro 4Q23

By Stefano Charrey, 9 January 2023


1. Executive Summary

The Timber Finance Carbon & Storage Index rose +13.9% in the first nine months of 2023, rising sharply in the last two months of the year on the broader market rally sparked by the “pivot” of the Federal Reserve, which has stopped hiking and is expected to cut rates in the medium term. The market, overall, is interpreting this positively for risky assets under a soft-landing base case. Construction activity is differentiated across geographies, with the U.S. market showing more resilience than its European counterparts. Residential inventories remain tight in several key regions.


2. Macro Overview

The key macro driver in the fourth quarter of 2023 was the change in market consensus and sentiment with respect to the normalisation of interest rates, which led to a rally in bonds and equities. The market saw the end of the tightening cycle as a bullish sign, not expecting the reduction in inflation rates to be caused by strong recessionary pressures.

In the United States, this indeed seems to be the case, at least based on the most recent macroeconomic data. The US economy remains very resilient and single-family housing starts picked up (partially compensated by stagnating multi-family starts). Building permits (see Figure below) have also remained resilient, at least relative to pre-covid levels, with low housing inventory supporting the sector. That said, compared to the extreme market conditions prevailing during 2020-2022, the normalization of construction activity is evident also in the U.S. and we have seen it already in the operating results of the companies in our universe, as discussed in other reports.

Construction activity in Europe has been particularly weak and building permits are near their lows. German residential building permits have been particularly weak and are significantly below pre-covid levels. Permits for prefabricated single-family homes have collapsed from their peak and are close to historical lows. In France we have somewhat different dynamics: single-family permits, while sharply decreasing in the first half of 2023, have recovered and are (on a seasonally adjusted basis, excluding 12-months averaging) around “normal” levels. However, residential permits overall (including multi-family) are weak and significantly below pre-covid levels.

The markets have been very fast in their reaction to the “pivot” by central banks, especially by the Federal Reserve, and interpreted the stabilization of monetary policy very positively, with a view towards rate cuts under the assumption of a soft-landing scenario. Going forward – assuming no major surprises on the inflation side – a key question is whether central banks will cut before a hard landing occurs. While construction markets are generally weak in Europe, housing markets remain tight in several regions and the reduced pace of construction that we are experiencing in Europe makes the balance between supply and demand even tighter. Anecdotally, Cushman & Wakefield highlighted already in August a severe apartment shortage in Sweden in over half of the municipalities and strongly rising rents[1]. In Germany, which in 2022 reached record-high immigration, the undersupply of apartments has been estimated at around 700’000 in a study by the Pestel Institut[2] – while numbers should be taken with care, this number is ca. twice as high as the reported number of annual permits for dwellings[3]. For investors, these imbalances also create longer-term opportunities.

Figure 1: building permits, indexed. Source: Ministère de la Transition Écologique et de la Cohésion des Territoires; Destatis Statistisches Bundesamt; U.S. Census Bureau, retrieved from FRED. Calculations by Timber Finance.


[1] https://www.cushmanwakefield.com/en/sweden/insights/sweden-marketbeat

[2] https://www.mieterbund.de/app/uploads/fileadmin/public/Studien/Studie_-_Bauen_und_Wohnen_in_der_Krise.pdf

[3] https://www.destatis.de/EN/Themes/Economic-Sectors-Enterprises/Construction/Tables/permits.html


3. Timber Stocks

2023 was a volatile but positive year for timber stocks overall: the Timber Finance Carbon & Storage Index rose +13.9%, after reaching a peak in February of +16.5% and a trough of -10.7% at the end of October, before rallying into year-end.

The best performing stocks are American: Builders FirstSource (BLDR) had a stellar performance of +157%, supported by resilient results while the market in 2022 had discounted a slowdown and normalization in earnings. The normalization relative to the 2022 peak materialized but results were still exceptionally strong in the first 9 months of 2023. The 2nd best performer in the index for the full year was UFP Industries (UFPI), the diversified wood products company producing structural lumber, wood packaging, wood products for exterior applications and more – it rose +60%. Also in this case, there was a normalization in the underlying profitability of the business, but it remained at very high levels. Both BLDR and UFPI are trading at EV/EBIT multiples for 2023 in the 10-11x range. The best-performing European stock was Svenska Cellulosa, +20% in USD-terms – the Swedish forest owner and integrated forest-products company gave some optimistic comments with respect to the stabilisation of demand and supply in pulp markets and reported strong forestry results, offsetting weakness in the durable wood products segment.

Among the worst-performing stocks have been Canadian lumber and pulp manufacturers. The retracement of lumber prices hit lumber manufacturers – Western Forest Products, the worst performer, was down -35% for the year in USD-terms and is now trading around 0.5x tangible book value with a bearish market consensus expecting losses to continue (and widen) into next year. The 2nd worst performer was Nexity, the French residential and office developer and operator, pioneer of timber construction, at -28% for the year. The weakness in the French market hit the company that announced in December plans to sell its residential property management services business to a private equity manager. The operating results have so far been supported by the company’s backlog, while new residential reservations have been declining significantly (-27% 9M23 vs. 9M22 in value terms). German wood-fibre insulation specialist STEICO was down -18% for the year – the company was forced to revise downwards the outlook due to the weak construction market and the rally in July after the acquisition of a 51% stake by Kingspan from STEICO’s founder and CEO was short-lived.

U.S. stocks contributed +12.5% to the overall performance of the index, Canadian stocks were slightly negative in aggregate, contributing -0.6%, while European stocks contributed +2.0%. These results reflect the 2023 macro environment, with a US construction market that was more resilient than its European counterpart, and lumber prices (affecting in particular Canadian lumber producers) that remained around their 2022 lows.


4. Disclosures and Conflicts of Interest

Some or all the companies mentioned in this report may be included in the Timber Finance Forest-Based Construction Basket tracker and are part of the Timber Finance Carbon Capture & Storage Index. Timber Finance Management and/or the Timber Finance Initiative may have commercial relationships or be in discussions with some of the companies mentioned in this report. Specifically, Stora Enso is a member of the Timber Finance Initiative association.

Please note that this research is prepared for information purposes and targeted to institutional investors in Switzerland. It does not represent investment advice and does not take into consideration the individual requirements, risk tolerance and goals of an investor. Recipients who are not Swiss institutional investors should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents.

The information presented in this report is obtained from several different public sources that we consider to be reliable. Nevertheless, we cannot guarantee the accuracy of the presented information. The information used may change quickly and we are not committed or obliged to modify the reports base on new information. The opinions and views expressed in this report reflect those of the author at the point in time of its compilation and may vary at any time. Valuation methods like DCF and any other analysis or expert judgement do not provide any guarantee that the target price or fair value will be reached, for example because of unforeseen changes in financial or economic conditions.

For more details and questions, please do not hesitate to get in touch with us at info@timberfinance.ch or:

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General disclaimer © 2023 Timber Finance Management AG (“Timber Finance”). All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of Timber Finance. Timber Finance Management AG makes no representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and Timber Finance Management AG and its third-party licensors shall have no liability for any errors, omissions, or interruptions of any index or the data included therein. All data and information is provided by Timber Finance “as is”. Past performance is not an indication or guarantee of future results. This document does not constitute an offer of any services. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments offered by third parties that are based on that index.

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