CANFOR CORPORATION
University of Victoria Student Research
CFA Institute Research Challenge 2012
Presentation Highlights
$14.41
Overview
Competitive Advantages
Rising Lumber Prices
Financial
Analysis
Valuation
$11.70
Risks
Increasing Lumber Demand
Company Overview
North American Operations
Overview
Financial
Analysis
Source: Canfor
 Headquartered in Vancouver, British Columbia
Valuation
 Lumber mill operations in British Columbia, Alberta, Quebec, Washington State,
South Carolina, North Carolina
 Largest Annual Production Capacity in North America (5.2 billion board feet)
 50.2% ownership stake in Canfor Pulp & Paper
Risks
Company Overview:
Major Markets
8000
2010 Total Regional Sawnwood Lumber Imports (MM Board Feet)
Overview
7000
6000
5000
Financial
Analysis
4000
3000
Valuation
2000
1000
0
Risks
Source: FAOSTAT
Industry Overview:
US Housing Starts and Lumber Prices
 United States: Expected recovery in the housing market will drive up lumber prices
Annualized Monthly US Housing Starts vs. Monthly Lumber Prices
2500
2000
400
Lumber Prices
1500
300
1000
200
Overview
Annual Housing Starts (Thousands)
500
Financial
Analysis
500
100
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0
1996
US Housing Starts
Valuation
0
Source: Random Lengths, ForecastChart
Correla on
600
Lumber Prices
Lunmber Prices ($ per Thousand Board Feet)
600
500

400
300

200

100
0
0
500
1000
1500
US Housing Starts
2000
2500
High growth potential in US paired with
Continued new growth in China
Potential for
Supernormal Sales
Growth in medium
term
Risks
Industry Overview:
Harvesting Restrictions in China
Overview
Financial
Analysis
Valuation
Risks
Industry Overview:
Growing Supply Gap in China
Sawnwood Lumber Exports to China (MM Board Feet)
Overview
Financial
Analysis
Valuation
Risks
Competitive Positioning: China
North America
Overview
Financial
Analysis
Valuation
Risks
FINANCIAL
ANALYSIS
Financial Analysis:
Return On Equity
ROE
Overview
6.00%
5.00%
Financial
Analysis
4.00%
3.00%
2.00%
Valuation
1.00%
0.00%
2010
2011E
2012E
2013E
2014E
2015E
Risks
Financial Analysis:
Lumber Sales
Japan
6%
2010
Other
1%
Overview
China
17%
Regional Lumber Sales Growth ($M)
US Housing
Rebound
United States
54%
Canada
22%
Other
2500
Japan
Financial
Analysis
2000
Canada
Rising
Lumber
Price
Canada,
15.41%
1000
500
United States
Other, 1.95%
0
2010
United
States,
47.81%
China,
31.68%
China
Valuation
2015E
Increasing
Japan, 3.15%
Chinese
Supply
Gap
1500
2011E
2012E
2013E
2014E
2015E
Risks
Financial Analysis:
Pulp Sales
Weakening
Demand
Overview
Pulp Sales ($ Millions)
1200
1000
Dropping
NBSK price
Financial
Analysis
800
600
400
200
0
2010
2011E
2012E
2013E
2014E
2015E
Valuation
Excess
Supply
 Canfor Pulp and Paper is not a
sustainable contributor to Canfor’s
Value
Risks
Financial Analysis:
Projected Ratios
Debt to Capital Ratio
EBITDA Margin
20%
12%
10%
8%
6%
4%
2%
0%
15%
10%
5%
0%
2010 2011E 2012E 2013E 2014E 2015E
Overview
2010 2011E 2012E 2013E 2014E 2015E
Current Ratio
Solvency Ratio
4.00
40%
3.00
30%
2.00
20%
1.00
10%
-
0%
2010 2011E 2012E 2013E 2014E 2015E
Financial
Analysis
Valuation
2010 2011E 2012E 2013E 2014E 2015E
Stability Level
Risks
VALUATION
Valuation
Final Value,
December
2012
EBITDA
Regression
Overview
Financial
Analysis
Multiple
Analysis
Discounted
Cash Flow
Captures the effect of shortterm cash flows on Canfor’s
value
Corrects for potential
inaccurate cyclical foresight
of DCF
Valuation
Risks
Discounted Cash Flow:
Asset Proportions
Ownership: Lumber
Ownership: Pulp and Paper
Overview
Other, 49.8%
Canfor , 50.2%
Canfor , 100%
Assets by Business Unit
Canfor Pulp Limited
Partnership, 24%
Canfor's Lumber
Opera ons and
Other, 76%
Financial
Analysis
Valuation
Risks
Discounted Cash Flow:
Post-Analytical FCFE Projection (2016 Onwards)
FCFE Growth Cycle Illustration
Overview
Financial
Analysis
Valuation
5 Year Positive Growth
Min: 0%, Max: 2.5%
3 Year Negative Growth
Min: 0%, Max: 2.5%
Risks
Discounted Cash Flow:
Analytical Phase (2012-2015)
Change In NonCash Working
Capital
Overview
Non-Cash Charges
Inflows
Financial
Analysis
Net Income
Capital Expenditures
Valuation
Outflows
Net Borrowing
FCFE, NET:
2012
2013
2014
2015
$102.94
$104.03
$120.23
$108.40
 Continued deleveraging
 Notable fixed capital investments
December 2012 DCF Value: $15.40
Risks
Multiple Analysis:
Similarity Assessment
Basis for Peer Company Similarity Assessment
WACC
Overview
Total
Assets
Other Factors
Timber Tenures
Ranking
Company
1
2
3
4
5
West Fraser Timber
Weyerhaeuser
Tembec
Western Forest Products
Abitibibowater
CAGR Sales
Efficiency
Exposure
Financial
Analysis
Valuation
WACC
Assets - ST
Investments
($M)
6.34%
2594
10.16%
563.7
West Fraser Timber
4.51%
2651.9
7.77%
544.1
Tembec
7.67%
1004
2.60%
Western Forest Products
7.08%
582
3.42%
249.9
Canada
Weyerhauser
7.05%
11962
7.29%
124.96
Canada, US, China, Uruguay
Abitibibowater
5.08%
6846
2.19%
Company
Canfor
CAGR Sales Timber Tenures ($M)
Regional Operations
Canada, US
Canada, US
Canada, US, France
Canada, US, S.Korea
Risks
Multiple Analysis:
Weighted Average Multiple
Similarity Ranking
Company
(2)
Similarity Score
(3)
Weight
(4)
EV/EBITDA (5)
Weighted EV/EBITDA
(4)*(5)
1
2
West Fraser Timber
Weyerhaeuser
5.61
3.23
32.52%
18.72%
7.9
15.8
2.57
2.96
3
4
5
Tembec
Western Forest Products
Abitibibowater
3.04
2.72
2.65
17.62%
15.77%
15.36%
6.2
9.7
4.2
1.09
1.53
0.65
Weighted average EV/EBITDA to apply to Canfor:
Overview
8.80
Financial
Analysis
2012
EBITDA:
$233.09M
Weighted
Average
EV/EBITDA:
8.80x
Enterprise Value:
$2,051,192,000
# Shares
Outstanding:
142,710,000
 West Fraser Timber and Weyerhaeuser are the most comparable to Canfor
Valuation
FY End 2012
Share Price:
$14.37
Risks
EBITDA Regression: Variables
 Method: Regress regional EBITDA over the following macroeconomic
variables in each region.
Geographic Segment
China
Japan
Europe
Canada
United States
Normalized Variables
Eurozone GDP
GDP
Eurozone
Domestic
Demand
Housing
& Prices
CNY/USDStarts
Exchange
Rate
Housing
Starts
USD/JPY
Exchange
Rate
EUR/USD
Exchange
Rate
Unemployment
Rate
Unemployment
Rate
USD/CAD Exchange Rate
Overview
Financial
Analysis
EBITDA Mean: $171 Million
Valuation
Risks
Final Value
$14.41
Final Value,
December
2012
Overview
$14.37
$15.40
Multiple
Analysis
Discounted
Cash Flow
Financial
Analysis
• 50% Weighting
• 40% Weighting
$10.58
Valuation
Statistical
Approach
• 10% Weighting
Risks
RISKS
Investment Risks
Investment Risks
Overview
Highest Impact
Disappointing US housing start growth
Lower than expected Chinese lumber demand growth
Sustained lull in lumber prices
Financial
Analysis
Exchange rate risk
Dangers to natural environment
Valuation
Government regulation changes
Failure to successfully renegotiate labour union terms
Lowest Impact
Termination of Softwood Lumber Agreement (SLA)
Risks
Rising
Strong
Growing
Lumber Competitive Lumber
Demand Positioning Prices
Appendix A: Financials
Appendix B: Financials
Appendix C: Financials
Appendix D: Financials
Appendix E: FCFE Sensitivity
Analysis
Appendix F: DCF Inputs
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Appendix G: Comparables
Source: Team C estimates
Appendix B: Comparable Analysis
This chart illustrates the similarities of observed companies to Canfor. We evaluate similarities based on demand and supply factors and
company fundamentals. Companies closer to Canfor are more more similar based on these factors.
Fundamentals
Market
Factors:
Exposure &
Supply
Source: Team C analysis
Appendix H: Company Similarity
Appendix I: Comparable Fundamentals
Company
Canfor
West Fraser
Weyerhaeuser
AbitibiBowater
Tembec
Western Forest Porducts
Lousiana Pacific
Plum Creek Timber
Norbord
Company
Canfor
West Fraser
Weyerhaeuser
AbitibiBowater
Tembec
Western Forest Porducts
Lousiana Pacific
Plum Creek Timber
Norbord
WACC
Cost of Equity
After Tax
Cost of
Debt
6.34%
4.51%
7.05%
5.08%
7.67%
7.08%
9.70%
4.48%
6.15%
6.68%
4.61%
8.11%
4.99%
7.52%
7.69%
9.84%
5.49%
6.46%
3.60%
3.74%
5.29%
5.76%
8.10%
4.32%
9.36%
3.89%
5.72%
% Equity
% Debt
89%
89%
62%
87%
73%
82%
70%
37%
58%
11%
11.00%
37.70%
12.60%
26.60%
17.90%
29.60%
63.20%
41.70%
Beta
1.071
0.58
1.41
0.67
1.27
1.31
1.82
0.79
1.02
Cost of
Debt
5.00%
5.20%
7.35%
8.00%
11.25%
6.00%
13.00%
5.40%
7.95%
RFR
Required
Return,
Market
2.16%
2.158%
2.158%
2.158%
2.158%
2.158%
2.158%
2.158%
2.158%
6.38%
6.38%
6.38%
6.38%
6.38%
6.38%
6.38%
6.38%
6.38%
Appendix J: Applied Ratios
Appendix K:
Regression Variables
Appendix L: Exchange Rates
Appendix M:
Management Change
Appendix N: Mountain Pine Beetle
Pine Volume Killed (millions of cubic meters
Entire Province
Timber Harvesting Land Base