Conifex Timber Inc (TSX: CFF) is a next-generation Canadian forest products company operating in one of the richest fibre baskets in North America, northern British Columbia. They produce high-quality lumber products and renewable energy from the company's sawmill and bioenergy plant in Mackenzie, B.C.

Investment Rationale

• Hedge Fund Holding 18.79% Stake in CFF: Polar Asset Management Partners Inc. (a Toronto, Canada-based hedge fund) is having an 18.79% stake in the CFF. Hedge fund stake, especially in a penny-cap stock, indicates a potential short-term price spurt, as they are usually short-term buyers with an aim to make a decent return in a short span of time. Also, the presence of Hedge Funds with this kind of massive stake gives a lot of confidence to the retail investors as their bets usually drawn upon deep, thorough analysis. Moreover, Polar Asset Management Partners has built a reputation as one of Canada's leading multi-strategy hedge fund firm, led by a seasoned team of portfolio managers that are committed to generating attractive risk-adjusted returns with a keen focus on capital preservation.

• Lumber Prices to Remain Elevated in Mid to Long-term: Despite a 27% correction in Lumber prices over the past one month, Lumber is still up approximately 34% on a YTD basis. Lumber prices are expected to remain elevated through 2022 due to supply-chain disruptions, and capacity constraints as very few new mills were built. Lumber prices hit an all-time high of almost $1,700 on May 7th as sawmills were unable to meet unexceptional demand for home building and home improvements spurred by the coronavirus lockdowns.
  

• Higher Demand for Lumber to Drive Growth: US housing starts on a seasonally adjusted annual basis averaged 1,613,000 in the first quarter of 2021, up 2% from the previous quarter and 9% from the first quarter of 2020. Lumber consumption per unit in single-family housing starts is generally considered to be two to three times greater than in multi-family housing starts. Going forward, demand for lumbar is likely to remain high on the back of higher housing construction activities.

• Industry Leading Margin Profile: The group reported a decent quarterly result and outperformed the industry median on various front. CFF’s industry-leading margin profile reflects the strong competitive advantage its shareholders are having against the industry peers.

• Consistently Deleveraging Balance Sheet: CFF has significantly reduced its debt position since December 2019, with debt-to-equity ratio came down from 2.06x at the end of December 2019 to 0.51x at the end of March 31, 2021. The company recorded a significant reduction in debt profile, with robust debt protection metrics with Net Debt/EBITDA ratio 4.94x.   

• Gradual Recovery in the Economy would Drive Growth: The company growth is broadly linked to an increase in the per capita income and higher disposable income in the hands of the consumers. After one and half years of slowdown in the broader economy in the wake of the COVID-19 pandemic, the thing has started improving gradually with robust job data numbers that came last week, and western countries are gradually coming back to normal.

• Hovering Above Long-term Support Level and 14-day RSI Indicates a Potential Pull-back: Despite the recent decline in the CFF stock price, CFF shares are still trading comfortability above the crucial 200-day SMA, which is considered as a long-term support level. Also, Price/200-day SMA stood at 1.27x, which implies the stock is trading approximately 27% away from its crucial long-term support level, indicates that the long-term bullish trend is largely intact despite recent consolidation in the stock after a splendid rally in the past one year. Moreover, on the daily price chart, momentum indicators 14-day RSI were also recovering from oversold territory to neutral territory, which indicates potential pull-back can be witnessed from the current levels in the next few trading session, “Ceteris Paribus”.

Technical Price Chart. Analysis by Kalkine Group

• Stock is Trading in a Rising Channel Pattern: On the weekly price chart, the stock is trading at the lower end of the rising channel. The rising channel is a bullish technical indicator, which means that the prices are forming a higher high and higher low. The stock is trading support at the upward sloping trend line.

• Stable Outlook: North American lumber market prices remain at historically elevated levels, fuelled by North American home construction and repair and remodelling activities. At their Mackenzie sawmill, the company expect to achieve annualized operating rates of approximately 96% for the remainder of 2021. Further, the Mackenzie power plant is forecasted to operate at full capacity and continue to generate a steady and diversified source of cash flow.

• Risk Associated to Investment: CFF's business is exposed to a variety of risks ranging from a sharp correction in the lumber prices, a slowdown in home innovation market, lower disposable income with the consumers, interest rate risk and forex risk as well.

Financial Highlights: Q1FY21

• Lumber production in the first quarter of 2021 totalled approximately 51.0 million board feet, representing operating rates of approximately 85% of annualized capacity. In the previous quarter, 48.3 million board feet of lumber was produced, which reflected a short period of downtime at the beginning of the quarter arising from challenging logging conditions. In the first quarter of 2020, CFF produced 38.2 million board feet of lumber as a result of a reduced daily operating configuration.
• Shipments of Conifex produced lumber totaled 37.8 million board feet in the first quarter of 2021, representing a decrease of 23% from the 49.1 million board feet shipped in the previous quarter and an increase of 1% from the 37.6 million board feet of lumber shipped in the first quarter of 2020.
• The lower shipments of Conifex produced lumber in the quarter were primarily due to ongoing railcar supply challenges.
• Revenues from lumber products were CAD 40.5 million in the first quarter of 2021, representing a decrease of 7% from the previous quarter and an increase of 94% from the first quarter of 2020. Compared to the previous quarter, the lower revenues were driven by lower shipment volumes, offset partially by higher realized lumber prices in the current quarter.
• Increased revenues from the first quarter of 2020 were driven by higher mill net realizations. The company’s lumber is typically sold 2-4 weeks in advance of its shipment date, resulting in a lag in the company’s realized lumber prices when compared to concurrently reported lumber prices. As a result, a portion of the significant lumber price increase during March 2021 will be realized in the second quarter of 2021.
• The cost of goods sold in the first quarter of 2021 decreased by 14% from the previous quarter and increased by 3% from the first quarter of 2020. The decrease in the cost of goods sold from the prior quarter was due to lower overall shipments in the current quarter, offset partially by higher log costs.
• Selling, general and administrative (“SG&A”) costs were CAD 2.2 million in the first quarter of 2021 compared to CAD 1.1 million in the previous quarter and CAD 1.7 million in the first quarter of 2020. The higher SG&A costs in the current quarter were primarily attributable to variable compensation costs, including equity-based compensation.
• Finance costs and accretion totaled CAD 1.1 million in the first quarter of 2021, CAD 1.3 million in the previous quarter and CAD 3.5 million in the first quarter of 2020. Finance costs in the first quarter of 2020 included CAD 2.2 related to the company’s previous secured credit facility that supported the company’s lumber mills which were repaid in full on February 1, 2020.
• At March 31, 2021, the company had total liquidity of CAD 16.4 million, compared to CAD 21.2 million at December 31, 2020 and CAD 12.1 million at March 31, 2020. Liquidity at March 31, 2021 was comprised of unrestricted cash of CAD 6.4 million and unused availability of CAD 10.0 million under the company’s secured revolving credit facility.

Top-10 Shareholders

Top-10 shareholders together hold 56.5% stake in the company, with Polar Asset Management Partners Inc. and Blue Wolf Capital Partners LLC are among the major investors in the company, with outstanding position of 18.8% and 15.3%, respectively.

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: Despite the penny cap market capitalization of the company, the company has strong fundamentals. Going forward, the lumber market is expected to remain strong in 2021, supported by robust demand from US housing starts and continued strength in the repair and remodeling sector. This would support the company’s financials in the near term. Moreover, CFF’s Mackenzie power plant is forecasted to operate at full capacity and continue to generate a steady and diversified source of cash flow.

Further, liquidity and financial position are expected to continue to strengthen in the second half of 2021. Funding quick payback sawmill upgrades and the NCIB program remains the company’s key priorities.

Moreover, the company has a solid balance sheet with robust debt protection metrics. And the presence of Canada’s leading Hedge Fund House with significant holding further extending the strong confidence. Based on Technical Analysis, the stock has support at CAD 1.75 level.

Therefore, based on the above rationale and valuation, we suggest a “Speculative Buy” recommendation on the stock at the closing price of CAD 2.16 on June 08, 2021.  

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

1-Year Technical Price Chart (as on June 08, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid at June 9, 2021 price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.