Author: SC
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1. Approach and Summary
This valuation analysis looks at the current and historical price to book values of European and North American timber stocks in the timber construction value chain.
Figure 1: Timber Construction Value Chain. Source: Timber Finance.
The period taken into consideration for historical ranges goes from January 2006 until December 2023, in order to cover a full cycle. Current P/B values (as of end of September 2024) are compared with historical ranges. It should be noted that companies evolve over time, as do accounting standards, so there are specificities characterising every company that need to be taken into consideration. When referring to “valuation”, generally P/B will be meant, although of course P/B is just one metric to consider when estimating fair value. Also, one should consider that the group of businesses analysed here is not homogeneous.
Overall, based on this simple valuation metric, the sector is trading at a discount to historical averages: currently 1.95x vs. 2.24x historical, which is a discount of more than 10%. This is largely explained by a cyclically weak phase, particularly in the European construction sector, generally in lumber markets, and to a lesser extent in U.S. construction activity. Based on this metric and with a long-term perspective, timber construction stocks appear appropriately valued.
Figure 2: Average Price-to-book ratio for timber stocks in the timber construction value chain (list in Figure 3). Sources: Bloomberg, Timber Finance.
The historical lows in the valuations were generally reached during the 2008-2009 crisis. Sub-sectors such as lumber and forestry equipment, trading at or very close to their historical lows in terms of valuation, offer significant upside in a recovery scenario.
2. Valuation of Stocks in the Timber Construction Value Chain
The historical ranges, the average over the period, and the latest P/B ratios are shown in Figure 3 for each company.
Figure 3: Price-to-book ratios for timber stocks in the timber construction value chain. Outlier periods excluded for BLDR, HUSQ, BCC. For stocks that IPOed after 2006, only the values since IPO are considered. Y-axis capped at 10x. Sources: Bloomberg, Timber Finance.
Timberland REITs’ valuations are very close and even (for Rayonier and Weyerhaeuser) exactly at the historical average. PotlatchDeltic is an exception, as it traded historically at very high premia to book value, but this was at a time when book value was, due to accounting rules, far away from a realistic market value of the timberlands – more so than some of its peers.
Vertically integrated Nordic forest owners are trading around their average historical book values. It should be noted, however, that in 2019 these forest owners changed the valuation method for their forest holdings, which materially increased book values. In any case, these companies are currently trading between a 20% discount (Stora Enso) to a 50% premium (UPM-Kymmene) to the net value of their assets as per balance sheet.
Canadian lumber manufacturers are trading at or towards the lows of their historical valuation range. This is explained by the weakness in lumber prices, which created a challenging environment for these companies. The fact that these stocks are trading at or close to historically low valuation levels also points to the pessimism that is currently priced into this sub-sector. The potential price appreciation in case of a sector turnaround is significant.
Distributors of timber products are generally trading close to their historical average valuations. Boise Cascade at 2.4x is slightly above its historical average, while Doman and James Latham at 1.1x resp. 1.3x are slightly below. Builders FirstSource is trading at a premium to its historical average, but the transformative growth of the company
For engineered wood products manufacturers, the picture is very different when comparing American and European companies: U.S. companies are trading in their upper range (Louisiana-Pacific, Trex, UFP Industries) while European peers are trading at the low-end (Steico, Accsys). This is to a large extent a reflection of the outperformance of the U.S. construction sector relative to the depressed European one.
Equipment manufacturers are trading around or below their average ranges. In particular European manufacturers (Husqvarna and Ponsse) are at their historical lows. A slowdown in investments by their customers, destocking after the 2021-2023 peak and individual challenges created multiple headwinds, which have led to widespread market pessimism that is reflected in these historically low multiples.
3. 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 may be 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. They do not represent investment advice and do 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.
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