West Fraser Timber Co. Ltd. (TSE:WFG) Shares Could Be 46% Below Their Intrinsic Value Estimate

Simply Wall St.05-25

Key Insights Using the 2 Stage Free Cash Flow to Equity, West Fraser Timber fair value estimate is CA$206 West Fraser Timber's CA$112 share price signals that it might be 46% undervalued Our ...

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(TSE:WFG) Shares Could Be 46% Below Their Intrinsic Value Estimate","media":"Simply Wall St.","content":"<div>\n<p>Key Insights\n\n Using the 2 Stage Free Cash Flow to Equity, West Fraser Timber fair value estimate is CA$206 \n West Fraser Timber's CA$112 share price signals that it might be 46% undervalued \n Our ...</p>\n\n<a href=\"https://finance.yahoo.com/news/west-fraser-timber-co-ltd-125309055.html\">Source Link</a>\n\n</div>\n","source":"yahoofinance","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>West Fraser Timber Co. Ltd. (TSE:WFG) Shares Could Be 46% Below Their Intrinsic Value Estimate</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nWest Fraser Timber Co. Ltd. (TSE:WFG) Shares Could Be 46% Below Their Intrinsic Value Estimate\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-25 20:53 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://finance.yahoo.com/news/west-fraser-timber-co-ltd-125309055.html><strong>Simply Wall St.</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Key Insights\n\n Using the 2 Stage Free Cash Flow to Equity, West Fraser Timber fair value estimate is CA$206 \n West Fraser Timber's CA$112 share price signals that it might be 46% undervalued \n Our ...</p>\n\n<a href=\"https://finance.yahoo.com/news/west-fraser-timber-co-ltd-125309055.html\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4186","symbol_name":"林业产品","start_time":0,"source_url":"https://finance.yahoo.com/news/west-fraser-timber-co-ltd-125309055.html","article_id":"2438076878","we_media_id":null,"thumbnails":["https://s.yimg.com/uu/api/res/1.2/_ueXAPfaXC0MLx4EZFH.zQ--~B/aD00MzI7dz0xMTk0O2FwcGlkPXl0YWNoeW9u/https://media.zenfs.com/en/simply_wall_st__316/3371c176148daa8f128721612ddecdcc"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2438076878","pubTimestamp":1716641589,"sourceInfo":{"source_id":"yahoofinance","name":"雅虎金融"},"weMediaInfo":null,"summary":"Using the 2 Stage Free Cash Flow to Equity, West Fraser Timber fair value estimate is CA$206. West Fraser Timber's CA$112 share price signals that it might be 46% undervalued. Our fair value estimate is 56% higher than West Fraser Timber's analyst price target of US$132. Today we'll do a simple run through of a valuation method used to estimate the attractiveness of West Fraser Timber Co. Ltd.  as an investment opportunity by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow  model on this occasion. Before you think you won't be able to understand it, just read on!Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.","collect":0,"end_time":0,"defaultTopTitle":"yahoo.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4186":"林业产品","TSE":"Trinseo","WFG":"西弗雷泽木业","TV":"墨西哥电视","FCF":"第一联邦金融","DCF":"Dreyfus Alcentra Global Credit Income 2024 Target Term Fund, Inc","BK4090":"商品化工","BK4100":"有线和卫星","BK4211":"区域性银行"},"translate_title":"West Fraser Timber Co.Ltd.（东京证券交易所代码：WFG）的股票可能比其内在价值估计低46%","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"DCF":1,"FCF":1,"TSE":1,"TV":1,"WFG":1},"content_text":"Key Insights\n\n Using the 2 Stage Free Cash Flow to Equity, West Fraser Timber fair value estimate is CA$206 \n West Fraser Timber's CA$112 share price signals that it might be 46% undervalued \n Our fair value estimate is 56% higher than West Fraser Timber's analyst price target of US$132 \n\n Today we'll do a simple run through of a valuation method used to estimate the attractiveness of West Fraser Timber Co. Ltd. (TSE:WFG) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine. \n Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. \n See our latest analysis for West Fraser Timber \n The Calculation \n We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. \n A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value: \n 10-year free cash flow (FCF) forecast \n\n\n\n\n2024\n2025\n2026\n2027\n2028\n2029\n2030\n2031\n2032\n2033\n\n\n Levered FCF ($, Millions) \nUS$287.3m\nUS$644.8m\nUS$823.7m\nUS$921.2m\nUS$903.2m\nUS$897.4m\nUS$898.9m\nUS$905.6m\nUS$916.0m\nUS$929.1m\n\n\nGrowth Rate Estimate Source\nAnalyst x3\nAnalyst x3\nAnalyst x1\nAnalyst x1\nAnalyst x1\nEst @ -0.64%\nEst @ 0.17%\nEst @ 0.75%\nEst @ 1.15%\nEst @ 1.43%\n\n\n Present Value ($, Millions) Discounted @ 8.2% \nUS$266\nUS$551\nUS$651\nUS$673\nUS$610\nUS$560\nUS$519\nUS$483\nUS$452\nUS$423\n\n\n\n(\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$5.2b\n We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 8.2%. \nTerminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$929m× (1 + 2.1%) ÷ (8.2%– 2.1%) = US$16b\nPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= US$16b÷ ( 1 + 8.2%)10= US$7.1b\n The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$12b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CA$112, the company appears quite good value at a 46% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind. \n\n\n\n  TSX:WFG Discounted Cash Flow May 25th 2024\n \n\n The Assumptions \n Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at West Fraser Timber as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.2%, which is based on a levered beta of 1.325. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business. \nSWOT Analysis for West Fraser Timber\n\n\nStrength\n\nDebt is not viewed as a risk.\n\n\nBalance sheet summary for WFG.\n\n\n\nWeakness\n\nDividend is low compared to the top 25% of dividend payers in the Forestry market.\n\n\n\nOpportunity\n\nExpected to breakeven next year.\n\n\nHas sufficient cash runway for more than 3 years based on current free cash flows.\n\n\nGood value based on P/S ratio and estimated fair value.\n\n\n\nThreat\n\nPaying a dividend but company is unprofitable.\n\n\nSee WFG's dividend history.\n\n\n\n Next Steps: \n Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price sitting below the intrinsic value? For West Fraser Timber, there are three additional factors you should consider: \n\nFinancial Health: Does WFG have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.\nFuture Earnings: How does WFG's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.\n Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing! \n\n PS. Simply Wall St updates its DCF calculation for every Canadian stock every day, so if you want to find the intrinsic value of any other stock just search here.\nHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. 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