RBC Analyst: Few Positives About Canadian Forest Sector

by: FP Trading Desk

The bad news first, and it’s no surprise: the one thing not growing on Canadian trees lately has been money.

Or, to put it in the words of RBC Capital Markets analyst Paul Quinn:

The strong Canadian dollar, in addition to escalating cost pressures from fibre, energy, transportation and chemical prices, led to disappointing results for the Canadian forest sector.

How disappointing? So far this year, the Canadian paper and forest products sub-index is down 14%, double the drop in the S&P/TSX composite index, and well over the 4% drop in the building materials index. The numbers get worse when you look at individual names. Of the 14 companies that Mr. Quinn covers, only one –  Fortress Paper Ltd. (FTP.TO) – is up by 20%.

Everyone else is down: AbitibiBowater Inc. (ABH) -74%, Catalyst Paper Corp. (OTC:CTLUF) -57%, Mercer International Inc. (NASDAQ:MERC) -39%, Domtar Corp. (NYSE:UFS) -39%, International Forest Products Ltd. [IFP-A.TO] - 38%. And the list goes on.

Yet, believe it or not, there is some goods news out there. It goes like this: forestry being cyclical, all those negative numbers mean at least some of the industry is poised to reverse its downhill slide. Mr. Quinn crunched the numbers using several valuation techniques to figure out which ones look most promising and produced a list of those which “offer investors an attractive entry point at this time.”

On the paper and forest products side, Catalyst, Domtar and Norbord Inc. (OTC:NBDFF). On the timberland side, both Acadian Timber Income Fund (OTC:ATBUF) and TimberWest Forest Corp. (OTC:TWTUF). Both of those look promising, thanks to investors who have seen the woods as a safe haven from the financial storm and have sent timberland values soaring.

Yet, Mr. Quinn still urged caution, recommending that investors continue to underweight the sector for some time to come. He expects “sloppy pulp and paper markets over the short-term,” and forecasts a continued softening in share values among building material companies over the next six months.

Beyond that, however, the horizon begins to brighten, as those low values provide “investors significant upside to the eventual housing market rebound in 2010- 2011.”