Intrinsic value of Western Forest Products Inc. - WEF

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$2.07

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$2.07

 
Intrinsic value

$9.67

 
Up/down potential

+367%

 
Rating

str. buy

 
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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of WEF stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  9.70
  10.20
  9.68
  9.21
  8.79
  8.41
  8.07
  7.76
  7.49
  7.24
  7.01
  6.81
  6.63
  6.47
  6.32
  6.19
  6.07
  5.96
  5.87
  5.78
  5.70
  5.63
  5.57
  5.51
  5.46
  5.41
  5.37
  5.34
  5.30
  5.27
  5.24
Revenue, $m
  1,187
  1,308
  1,435
  1,567
  1,705
  1,848
  1,997
  2,152
  2,313
  2,481
  2,655
  2,836
  3,024
  3,219
  3,423
  3,635
  3,855
  4,085
  4,325
  4,575
  4,836
  5,108
  5,393
  5,690
  6,001
  6,326
  6,665
  7,021
  7,393
  7,783
  8,191
Variable operating expenses, $m
 
  647
  710
  776
  844
  915
  989
  1,065
  1,145
  1,228
  1,314
  1,404
  1,497
  1,594
  1,694
  1,799
  1,908
  2,022
  2,141
  2,265
  2,394
  2,529
  2,669
  2,816
  2,970
  3,131
  3,299
  3,475
  3,660
  3,853
  4,055
Fixed operating expenses, $m
 
  492
  504
  517
  530
  543
  557
  571
  585
  599
  614
  630
  646
  662
  678
  695
  713
  730
  749
  767
  787
  806
  826
  847
  868
  890
  912
  935
  958
  982
  1,007
Total operating expenses, $m
  1,056
  1,139
  1,214
  1,293
  1,374
  1,458
  1,546
  1,636
  1,730
  1,827
  1,928
  2,034
  2,143
  2,256
  2,372
  2,494
  2,621
  2,752
  2,890
  3,032
  3,181
  3,335
  3,495
  3,663
  3,838
  4,021
  4,211
  4,410
  4,618
  4,835
  5,062
Operating income, $m
  131
  169
  220
  274
  331
  390
  452
  516
  583
  653
  726
  802
  881
  964
  1,050
  1,140
  1,234
  1,333
  1,435
  1,543
  1,656
  1,773
  1,897
  2,026
  2,162
  2,304
  2,454
  2,611
  2,775
  2,948
  3,130
EBITDA, $m
  165
  206
  261
  319
  380
  443
  509
  578
  650
  724
  802
  884
  968
  1,056
  1,148
  1,245
  1,345
  1,450
  1,559
  1,674
  1,794
  1,920
  2,052
  2,190
  2,334
  2,486
  2,645
  2,812
  2,987
  3,171
  3,365
Interest expense (income), $m
  3
  2
  4
  5
  7
  9
  11
  13
  15
  17
  19
  22
  24
  26
  29
  32
  35
  37
  41
  44
  47
  50
  54
  58
  62
  66
  70
  75
  79
  84
  90
Earnings before tax, $m
  127
  166
  217
  269
  324
  381
  441
  503
  568
  636
  707
  781
  857
  938
  1,021
  1,109
  1,200
  1,295
  1,395
  1,499
  1,609
  1,723
  1,843
  1,968
  2,100
  2,239
  2,384
  2,536
  2,696
  2,864
  3,040
Tax expense, $m
  33
  45
  58
  73
  87
  103
  119
  136
  153
  172
  191
  211
  232
  253
  276
  299
  324
  350
  377
  405
  434
  465
  498
  531
  567
  604
  644
  685
  728
  773
  821
Net income, $m
  94
  122
  158
  196
  236
  278
  322
  368
  415
  464
  516
  570
  626
  684
  746
  809
  876
  945
  1,018
  1,094
  1,174
  1,258
  1,345
  1,437
  1,533
  1,634
  1,740
  1,851
  1,968
  2,091
  2,219

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  19
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  777
  835
  916
  1,001
  1,089
  1,180
  1,275
  1,374
  1,477
  1,584
  1,695
  1,811
  1,931
  2,056
  2,186
  2,321
  2,462
  2,609
  2,762
  2,921
  3,088
  3,262
  3,444
  3,633
  3,832
  4,039
  4,256
  4,483
  4,721
  4,970
  5,231
Adjusted assets (=assets-cash), $m
  758
  835
  916
  1,001
  1,089
  1,180
  1,275
  1,374
  1,477
  1,584
  1,695
  1,811
  1,931
  2,056
  2,186
  2,321
  2,462
  2,609
  2,762
  2,921
  3,088
  3,262
  3,444
  3,633
  3,832
  4,039
  4,256
  4,483
  4,721
  4,970
  5,231
Revenue / Adjusted assets
  1.566
  1.566
  1.567
  1.565
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
  1.566
Average production assets, $m
  463
  510
  560
  611
  665
  721
  779
  839
  902
  967
  1,035
  1,106
  1,179
  1,256
  1,335
  1,418
  1,504
  1,593
  1,687
  1,784
  1,886
  1,992
  2,103
  2,219
  2,340
  2,467
  2,600
  2,738
  2,883
  3,035
  3,195
Working capital, $m
  178
  175
  192
  210
  228
  248
  268
  288
  310
  332
  356
  380
  405
  431
  459
  487
  517
  547
  580
  613
  648
  684
  723
  762
  804
  848
  893
  941
  991
  1,043
  1,098
Total debt, $m
  34
  60
  87
  115
  145
  175
  207
  240
  275
  311
  348
  387
  427
  469
  512
  558
  605
  654
  705
  759
  814
  873
  934
  997
  1,064
  1,133
  1,206
  1,282
  1,362
  1,445
  1,532
Total liabilities, $m
  255
  280
  307
  335
  365
  395
  427
  460
  495
  531
  568
  607
  647
  689
  732
  778
  825
  874
  925
  979
  1,034
  1,093
  1,154
  1,217
  1,284
  1,353
  1,426
  1,502
  1,582
  1,665
  1,752
Total equity, $m
  523
  555
  609
  665
  724
  785
  848
  914
  982
  1,053
  1,127
  1,204
  1,284
  1,367
  1,453
  1,543
  1,637
  1,735
  1,837
  1,943
  2,054
  2,169
  2,290
  2,416
  2,548
  2,686
  2,830
  2,981
  3,140
  3,305
  3,478
Total liabilities and equity, $m
  778
  835
  916
  1,000
  1,089
  1,180
  1,275
  1,374
  1,477
  1,584
  1,695
  1,811
  1,931
  2,056
  2,185
  2,321
  2,462
  2,609
  2,762
  2,922
  3,088
  3,262
  3,444
  3,633
  3,832
  4,039
  4,256
  4,483
  4,722
  4,970
  5,230
Debt-to-equity ratio
  0.065
  0.110
  0.140
  0.170
  0.200
  0.220
  0.240
  0.260
  0.280
  0.290
  0.310
  0.320
  0.330
  0.340
  0.350
  0.360
  0.370
  0.380
  0.380
  0.390
  0.400
  0.400
  0.410
  0.410
  0.420
  0.420
  0.430
  0.430
  0.430
  0.440
  0.440
Adjusted equity ratio
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665
  0.665

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  94
  122
  158
  196
  236
  278
  322
  368
  415
  464
  516
  570
  626
  684
  746
  809
  876
  945
  1,018
  1,094
  1,174
  1,258
  1,345
  1,437
  1,533
  1,634
  1,740
  1,851
  1,968
  2,091
  2,219
Depreciation, amort., depletion, $m
  34
  38
  41
  45
  49
  53
  57
  62
  66
  71
  76
  81
  87
  92
  98
  104
  111
  117
  124
  131
  139
  146
  155
  163
  172
  181
  191
  201
  212
  223
  235
Funds from operations, $m
  103
  159
  199
  241
  285
  331
  379
  429
  481
  536
  592
  651
  713
  777
  844
  913
  986
  1,063
  1,142
  1,226
  1,313
  1,404
  1,500
  1,600
  1,705
  1,816
  1,931
  2,053
  2,180
  2,314
  2,454
Change in working capital, $m
  -25
  16
  17
  18
  18
  19
  20
  21
  22
  22
  23
  24
  25
  26
  27
  28
  30
  31
  32
  34
  35
  36
  38
  40
  42
  44
  46
  48
  50
  52
  55
Cash from operations, $m
  128
  155
  182
  224
  267
  312
  359
  408
  460
  513
  569
  627
  687
  751
  816
  885
  957
  1,032
  1,110
  1,192
  1,278
  1,368
  1,462
  1,560
  1,664
  1,772
  1,886
  2,005
  2,130
  2,262
  2,400
Maintenance CAPEX, $m
  0
  -34
  -38
  -41
  -45
  -49
  -53
  -57
  -62
  -66
  -71
  -76
  -81
  -87
  -92
  -98
  -104
  -111
  -117
  -124
  -131
  -139
  -146
  -155
  -163
  -172
  -181
  -191
  -201
  -212
  -223
New CAPEX, $m
  -56
  -48
  -49
  -52
  -54
  -56
  -58
  -60
  -63
  -65
  -68
  -71
  -73
  -76
  -79
  -83
  -86
  -90
  -93
  -98
  -102
  -106
  -111
  -116
  -121
  -127
  -133
  -139
  -145
  -152
  -159
Cash from investing activities, $m
  -56
  -82
  -87
  -93
  -99
  -105
  -111
  -117
  -125
  -131
  -139
  -147
  -154
  -163
  -171
  -181
  -190
  -201
  -210
  -222
  -233
  -245
  -257
  -271
  -284
  -299
  -314
  -330
  -346
  -364
  -382
Free cash flow, $m
  72
  74
  95
  131
  168
  207
  248
  291
  335
  382
  430
  480
  533
  588
  645
  704
  767
  832
  900
  971
  1,045
  1,123
  1,204
  1,290
  1,379
  1,473
  1,572
  1,675
  1,784
  1,897
  2,017
Issuance/(repayment) of debt, $m
  -29
  26
  27
  28
  29
  31
  32
  33
  34
  36
  37
  39
  40
  42
  44
  45
  47
  49
  51
  53
  56
  58
  61
  64
  66
  70
  73
  76
  80
  83
  87
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -31
  26
  27
  28
  29
  31
  32
  33
  34
  36
  37
  39
  40
  42
  44
  45
  47
  49
  51
  53
  56
  58
  61
  64
  66
  70
  73
  76
  80
  83
  87
Total cash flow (excl. dividends), $m
  42
  99
  122
  159
  198
  238
  280
  324
  370
  417
  467
  519
  573
  629
  688
  750
  814
  881
  951
  1,024
  1,101
  1,181
  1,265
  1,353
  1,446
  1,543
  1,644
  1,751
  1,863
  1,981
  2,104
Retained Cash Flow (-), $m
  -67
  -51
  -54
  -56
  -58
  -61
  -63
  -66
  -68
  -71
  -74
  -77
  -80
  -83
  -86
  -90
  -94
  -98
  -102
  -106
  -111
  -116
  -121
  -126
  -132
  -138
  -144
  -151
  -158
  -166
  -173
Prev. year cash balance distribution, $m
 
  19
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  67
  69
  103
  139
  177
  217
  258
  301
  346
  393
  442
  493
  546
  602
  660
  720
  783
  849
  918
  990
  1,065
  1,144
  1,227
  1,314
  1,405
  1,500
  1,600
  1,705
  1,815
  1,931
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  64
  63
  90
  115
  137
  157
  174
  188
  199
  206
  210
  210
  208
  202
  194
  183
  170
  156
  141
  126
  110
  95
  80
  67
  55
  44
  34
  26
  20
  15
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Western Forest Products Inc. operates as an integrated softwood forest products company. The company is involved in the harvesting of timber; reforestation; forest management; manufacture and sale of lumber and wood chips; sale of logs; and lumber remanufacturing. Its products include western red cedar, hem-fir, douglas fir, yellow cedar, and sitka spruce lumber. The company sells its products in approximately 25 countries worldwide. Western Forest Products Inc. was founded in 1955 and is headquartered in Vancouver, Canada.

FINANCIAL RATIOS  of  Western Forest Products Inc. (WEF)

Valuation Ratios
P/E Ratio 8.7
Price to Sales 0.7
Price to Book 1.6
Price to Tangible Book
Price to Cash Flow 6.4
Price to Free Cash Flow 11.4
Growth Rates
Sales Growth Rate 9.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -9.7%
Cap. Spend. - 3 Yr. Gr. Rate -1%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 6.5%
Total Debt to Equity 6.5%
Interest Coverage 43
Management Effectiveness
Return On Assets 12.7%
Ret/ On Assets - 3 Yr. Avg. 11.3%
Return On Total Capital 17.5%
Ret/ On T. Cap. - 3 Yr. Avg. 15.5%
Return On Equity 19.2%
Return On Equity - 3 Yr. Avg. 17.8%
Asset Turnover 1.6
Profitability Ratios
Gross Margin 19.8%
Gross Margin - 3 Yr. Avg. 19%
EBITDA Margin 13.8%
EBITDA Margin - 3 Yr. Avg. 11.1%
Operating Margin 11%
Oper. Margin - 3 Yr. Avg. 8.4%
Pre-Tax Margin 10.7%
Pre-Tax Margin - 3 Yr. Avg. 7.9%
Net Profit Margin 7.9%
Net Profit Margin - 3 Yr. Avg. 7.1%
Effective Tax Rate 26%
Eff/ Tax Rate - 3 Yr. Avg. 10.8%
Payout Ratio 34%

WEF stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the WEF stock intrinsic value calculation we used $1187 million for the last fiscal year's total revenue generated by Western Forest Products Inc.. The default revenue input number comes from 2016 income statement of Western Forest Products Inc.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our WEF stock valuation model: a) initial revenue growth rate of 10.2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for WEF is calculated based on our internal credit rating of Western Forest Products Inc., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Western Forest Products Inc..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of WEF stock the variable cost ratio is equal to 49.5%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $480 million in the base year in the intrinsic value calculation for WEF stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 6.2% for Western Forest Products Inc..

Corporate tax rate of 27% is the nominal tax rate for Western Forest Products Inc.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the WEF stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for WEF are equal to 39%.

Life of production assets of 13.6 years is the average useful life of capital assets used in Western Forest Products Inc. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for WEF is equal to 13.4%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $523 million for Western Forest Products Inc. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 389.981 million for Western Forest Products Inc. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Western Forest Products Inc. at the current share price and the inputted number of shares is $0.8 billion.


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Stock chart of WEF Financial statements of WEF
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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