Conifex Timber (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

• Solid Second Quarter Performance: The company reported solid second-quarter performance on the back of record-high underlying commodity prices. Revenues from lumber products were CAD 89.1 million in the second quarter of 2021, representing an increase of 120% from the previous quarter and an increase of 1,410% from the second quarter of 2020. Compared to the previous quarter, the higher revenues in the current quarter were driven by higher shipment volumes and higher realized lumber prices. The company reported a net income of CAD 26.1 million as compared to a net loss of CAD 3 million in the same quarter of the previous year.

• Debt Reduction: Overall debt was CAD 61.6 million on June 30, 2021, compared to CAD 63.4 million on December 31, 2020. The reduction of CAD 1.8 million in debt comprised net lease repayments of CAD 0.3 million and Power Term Loan payments of CAD 1.5 million.

• Improved Liquidity: On June 30, 2021, the group had total liquidity of CAD 45.8 million, compared to CAD 21.2 million on December 31, 2020, and CAD 11.5 million on June 30, 2020. Liquidity at June 30, 2021, was comprised of unrestricted cash of CAD 35.8 million and unused availability of CAD 10.0 million under our CAD 10.0 million secured revolving credit facility with Wells Fargo Capital Finance Corporation Canada.

• Significant Hedge Fund Holding: Polar Asset Management Partners Inc. (a Toronto, Canada-based hedge fund management firm) is having a 19.02% stake in the CFF. Hedge fund's stake, especially in a penny-cap stock, indicates a potential short-term price spurt, as they are usually short-term buyers with the aim to make a decent return in a short span of time. Also, the presence of Hedge Funds with this kind of stake gives a lot of confidence to the retail investors as their bets are usually drawn upon deep, thorough analysis. Moreover, Polar Asset Management Partners has built a reputation as one of Canada's leading multi-strategy hedge funds, led by a seasoned team of portfolio managers that are committed to generating attractive risk-adjusted returns with a keen focus on capital preservation.

• Stable Outlook: CFF's liquidity and financial position are forecasted to continue to remain strong in the second half of 2021; funding quick payback sawmill upgrades and the NCIB program remain key priorities. We believe that CFF's strengthened liquidity position would allow them to manage any further market volatility that may arise in the coming months. Sustained robust demand from US housing starts and recovery of repair and remodelling activities would result in better-balanced lumber markets and a gradual recovery of lumber prices through the remainder of the year. Further, the company expect to achieve annualized operating rates of approximately 90% in the third quarter, ramping up to annualized operating rates approaching 100% through the fourth quarter of 2020.

• Bullish Range Shift: The leading momentum indicator, the 14-day RSI, after hovering for a month below 40, which is considered a downtrend, finally moved above 40 in the last trading session with a large bullish candle and high volume. When the RSI oscillator moved above 40 with strong volume and a large bullish candlestick, it is typically considered as a bullish range shift. However, if it sustains above it for next few trading session and makes 40 a new RSI support, the stock could deliver significantly well in short-term.

Technical Chart (as on August 10, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Prices are sustaining above the rising trend line: On the weekly chart, CFF prices have been under pressure from the high of CAD 2.85 and made a recent low of CAD 1.55 level on 19 July 2021. After this massive sell-off, prices are continuously sustaining above the upward sloping and taking support of the same. The leading indicator RSI (14-Period) is trading at ~42.08 levels and showing strength, indicating bullish momentum in the stock.

Technical Chart (as on August 10, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Financial Highlights: Q2FY21

Source: Company Filings

• Lumber production in the second quarter of 2021 totalled approximately 49.0 million board feet, representing operating rates of approximately 82% of annualized capacity. In the previous quarter, 51.0 million board feet of lumber was produced.
• The decrease in lumber production for the second quarter primarily reflected challenging logging conditions characterized by unseasonal wet weather through the quarter, combined with high wildfire risk late in the last two weeks of the quarter.
• Shipments of Conifex produced lumber totaled 55.5 million board feet in the second quarter of 2021, representing an increase of 47% from the 37.8 million board feet shipped in the previous quarter and an increase of 553% from the 8.5 million board feet of lumber shipped in the second quarter of 2020.
• Total revenue nudged gigantically by 794% to CAD 96.5 million on a YoY basis, on the back of higher lumber product sales.
• Revenues from lumber products were CAD 89.1 million in the second quarter of 2021, representing an increase of 120% from the previous quarter and an increase of 1,410% from the second quarter of 2020. Compared to the previous quarter, the higher revenues in the current quarter were driven by higher shipment volumes and higher realized lumber prices.
• The cost of goods sold in the second quarter of 2021 increased by 65% from the previous quarter and increased by 428% from the second quarter of 2020. The increase in the cost of goods sold from the prior quarter is due to higher overall shipments in the current quarter, including higher volumes of wholesale shipments and higher log costs.
• During the second quarter of 2021, the company recognized net income from continuing operations of CAD 26.1 million, or CAD 0.56 per share compared to CAD 4.5 million or CAD 0.10 per share in the previous quarter and a net loss of CAD 2.7 million or CAD 0.05 per share in the second quarter of 2020.

Top-10 Shareholders

Top-10 shareholders together hold a 42.08% 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 an outstanding position of 19.02% and 15.43%, respectively.

Valuation Methodology (Illustrative): EV to EBITDA 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: The company is built upon strong fundamentals and delivered a solid Q2FY21 result. Though the lumber prices have declined recently, we expect it to recover from the current trading levels on the back of strong demand from US housing and continued strength in the repair and remodelling sector.

Moreover, the company’s Mackenzie sawmill is expected to achieve annualized operating rates of approximately 90% in the third quarter, ramping up to annualized operating rates approaching 100% through the fourth quarter of 2021. Mackenzie power plant is forecasted to operate at full capacity and continue to generate a steady and diversified source of cash flow, with seasonally stronger EBITDA contributions expected in the closing quarter of 2021.

Liquidity and financial position are forecasted to continue to remain strong in the second half of 2021. 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 extends the confidence.

Further, a bullish RSI range shift appeared on the daily price chart, with a long bullish candlestick and above 20-day average volume, indicating a potential upside in the stock in the near future.

Therefore, based on the above rationale and valuation, we suggest a “Speculative Buy” recommendation on the stock at the closing price of CAD 1.75 on August 10, 2021.

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

Technical Analysis Summary

1-Year Price Chart (as on August 10, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid at August 11, 2021 price as well.

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Disclaimer

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