Conifex Timber Inc (TSX: CFF) is a Canadian  based forestry company majorly operates in two segments, ie, Lumber and Bioenergy. The company’s lumber segment includes timber harvesting, reforestation, forest management etc. Mainly, the company generates revenue from the Lumber segment.

Investment Rationale

• Lumber Prices Up ~43% from 52W Low: Lumber Futures have tested its 52W Low of USD 448 per thousand board feet on August 20, 2021, and since then Lumber price witnessed a sharp recovery, up ~43% from 52W low level to USD 640.5 per thousand board feet on the last trading session (October 5, 2021). The sharp recovery in the lumber prices will bolster CFF’s topline and bottom line. 

• Using Debt Quite Sensibly: CFF’s Debt/Equity ratio as of June 30, 2021, stood at 0.43x, lowered from 0.51x reported as of March 31, 2021. Moreover, CFF’s Net debt is only 1.14 times of its EBITDA. So we are pretty relaxed about its super-conservative use of debt.
  

• Low Price-to-Free Cash Flow (P/FCF) Multiple-“Undervalued”: Looking from the TTM Price to Free Cash Flow multiple perspective, CFF shares are trading at a multiple of 2.18x, whereas its peer’s median P/FCF stood at 3.94x, implies that CFF shares are available at a discount of 45% against its peers. Relatively low Price/FCF suggests the company’s market cap is low relative to the free cash flow it’s spitting off, a value pick.

• Higher Institutional Ownership: Despite a penny cap market categorization of the company, institutional ownership is significantly higher at 39.25%, which provides confidence to the retail investors as presence of institutional investors reduces chances of financial shenanigans.

• Trading Above Upward Trend Line-Bullish Indicator: On the weekly price chart, CFF shares are trading well above the upwards trend line, which is acting as crucial support. This typically considered as bullish indicator as stock is holding its support levels strongly.

               

Weekly Technical Chart (as on October 05, 2021). Analysis by Kalkine Group

• RSI Indicating a Bullish Bias: The leading momentum indicator, the 14-day RSI hovering in a neutral zone, with bullish bias at 55.9. Further, a RSI range shift took place in the stock on September 20, 2021 and since the RSI has not moved below 40, indicating that bearishness has largely exhausted, and a potential upside is on the cards.

               

Technical Chart (as on October 05, 2021). Analysis by Kalkine Group

• Bullish Break-out above 21-day and 50-day SMAs: On the daily price chart, CFF shares registered a technical breakout as its shares moved above its crucial resistance levels of 21-day and 50-day SMA, a bullish indicator. Further, moving averages are also rising another bullish indicator.

Technical Chart (as on September 05, 2021). Analysis by Kalkine Group

Risk  Associated to Investment:

The company is exposed to a variety of risks ranging from sharp decline in the lumber prices in the wake of supply glut, supply chain disruption risks due to resurgence in the COVID-19 cases, inflationary pressure on input costs, forex risk and other macroeconomic risks.

Financial Highlights: Q2FY21 (all figures are in CAD)

Source: Company Filing

• Significant Revenue Jump:

During the second quarter under review, revenues from lumber products were CAD 89.1 million representing an increase of 120% on Q-o-Q basis and an increase of 1,410% on a YoY basis, largely driven by skyrocketing lumber prices over the past one year. Higher revenue on a sequential quarter basis mainly driven by higher shipment volumes and higher lumber realization prices.

• COGS Up on the Back of Higher Shipment Volume:

COGS  during the quarter under consideration increased by 65% on sequential quarter basis and increased by 428% on a YoY basis, primarily on account of higher shipment volumes recorded in Q2FY21.

• Turned Profitable at Operating Level

The company reported operating income during the Q2FY21 stood at 33.5 million as compared to operating loss of CAD 1.4 million reported in the same quarter of the previous financial year.

• Reported Positive EBITDA

EBITDA from continuing operations has soared to CAD 37.8 million against negative EBITDA of CAD 1.2 million reported a year before.

• Reported Net Income vs Net Loss a Year Before

The company generated net income of CAD 26.1 million in the quarter under review as compared to net loss of CAD 2.7 million in the same quarter of corresponding financial year.

• Deleveraged Balance Sheet

Company slightly deleveraged its balance sheet in second quarter of fiscal 2021, with overall debt as of June 30, stood at CAD 61.6 million as compared to CAD 63.4 million reported as on December 31, 2020.

• Improved Liquidity

As of June 30, 2021, total liquidity stood at CAD 45.8 million, compared to CAD 21.2 million as on December 31, 2020, and CAD 11.5 million as of June 30, 2020.

Top-10 Shareholders:

Top-10 shareholders together holds approximately 43.58% stake in the company, with Polar Asset Management Partners Inc. and Blue Wolf Capital Partners LLC are the major shareholders with an outstanding position of 19.02% and 15.43% respectively.

Source: Refinitiv

Valuation Methodology (illustrative): EV/Sales-Based Valuation

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

Stock Recommendation

CFF shares witnessed large swings since May 2021, mainly because of higher volatility in the lumber prices However, despite recent correction took place in the stock, its shares are still trading 87% away from its 52W low and ~34% below its 52W high, implies that the broader trend in more tilted towards Bulls and bulls are still heavy on Bears.

The recent Bullish reversal in the Lumber prices is expected to give strength to CFF stocks on the broader bourse. Moreover, CFF shares are also gaining technical strength, with its shares registered a bullish crossover above crucial short-term resistances of 21-day and 50-day SMAs and managing to trade above it.

The leading momentum indicator, the Moving Average Convergence Divergence (MACD) is rising and registered a crossover where MACD oscillator decisively moved above 9-day SMA signal line, a bullish indicator. Also, the difference between  short-length 12-day EMA and long-length 26-day EMA is positive, another bullish indicators.

However, a sharp plunge in the Lumber prices could have significant negative impact on its share price. Further, given the penny-cap market capitalization of the company, investor’s risk exposure is higher.

Hence, after considering the risk and reward associated to the CFF shares, we recommend a “Speculative Buy” rating at the closing price of CAD 1.89 (as on October 05, 2021). 

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

Technical Summary:

One-Year Technical Price Chart (as on October 05, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid at October 07, 2021 price as well.

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Disclaimer

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