Doman Building Materials Group Ltd (TSX:DBM), formerly CanWel Building Materials Group Ltd is a wholesale distributor of building materials and home renovation products. It primarily serves new home construction, home renovation, and industrial markets, as well as provides its building products to dealer/lumberyard and home improvement centers.

Investment Rationale

An Income Play: The company is offering a lucrative dividend yield of 6.96% amid lower interest rate environment. DBM has long history of paying dividend consistently regardless of the economic cycle. Further, Dividend yield of DBM is approximately 4.2 times of the Canada 10-Year Government Bond Yield of 1.66% (October 25, 2021).

Dividend History. Source: REFINITIV, Analysis by Kalkine Group

Strategically Hedging Commodity Prices: DBM  management implementing mitigation strategies to cool of  the potential impacts of future construction materials price volatility. These strategies comprises of, the use of vendor managed inventories, direct shipments from the manufacturer to the customer, use of lumber futures contracts and the Company’s internal policy of optimizing inventory levels to maintain its high standard of customer service levels and minimizing excess inventory otherwise exposed to market fluctuations.

Insiders Net Buyers Over Last 1-Year: Over the last one year’s insiders are turned out to be net buyers in DBM shares. Moreover, average buying price of insiders is relatively higher from current market price. Insiders buying indicates that outlook of the company is positive.

Insider Buying Over Last 1-Year. Source: REFINITIV, Analysis by Kalkine Group

Higher Debt but Strong Debt Protection Metrices: The company has relatively higher debt contribution in the balance sheet, as of June 30, 2021, Debt/Equity ratio of the company stood at 1.98x, significantly higher compared to the industry median of 0.84x. However, the company has strong Debt protection metrices, Net Debt is just 7.8x of the EBITDA, and Interest coverage ratio of 12.71x as of June 30, 2021, implies robust debt protection and reduces balance sheet risks.

Competitive Pricing Strength: The group prices its products in the competitive construction materials market so that the Company’s profitability is based on cost plus value-added services such as wood pressure treating, distribution, short-term financing and other services provided., which gives key competitive advantage to DBM against the peers.

Generating Higher Return on Shareholders’ Money: The company is generating significantly higher return on equity (ROE) against the peers. TTM Return on Equity  (Common equity) of the company stood at 32.7% whereas industry average stood at 13.9%, implies a strong competitive edge DBM shareholders are having over the competition.

RSI 40 Support on Weekly: On weekly price chart, the momentum indicator 14-Period RSI has taken strong near 40 for couple of weeks and now moving upward, which indicates that bearishness in the stock is now exhausted, and a potential upside could take place from the current trading level. Also, on weekly chart, DBM shares have recorded three consecutive positive candles, which indicates that bears are now able to bring DBM shares down, which is a positive indicator.

Technical Chart (October 25, 2021). Source: REFINITIV, Analysis by Kalkine Group.

Risk Associated to Investment

The Company is subject to normal business risks associated with similar firms operating within the building materials industry in Canada and the US, including sales and margin risk, intense competition, risks associated with the introduction of new product lines, product design risk, product liability risk, environmental risks, volatility of commodity prices, inventory risks, customer and vendor risks. 

Financial Highlights: Q2FY21

Source: Company Filing

• Revenue up ~83% on a YoY basis: DBM revenue for the Q2FY21 were CAD 756.8 million compared to CAD 412.9 million in the comparative period in 2020, representing an increase of CAD 343.9 million or 83.3% on a YoY basis, mainly driven by 84.6% increase Building Materials segment revenue on the back of acquisitions made and increase in construction material prices.
• Revenue Mix: During the quarter the company’s revenue were made up of 76% of construction materials, compared to 67% during the same quarter last year, with the remaining balance of sales resulting from specialty and allied products of 21% (2020 - 28%) and other of 3% (2020 - 5%).
• Higher Gross Profit: During the quarter, Gross profit increased to CAD 131.2 million compared to CAD 58.9 million in the same period of 2020.
• Increased Operating Expenses: Expenses in Q2FY21 were CAD 47.9 million as compared to CAD 37.2 million for the same quarter in 2020, an increase of CAD 10.7 million or 28.8%, due to 37.6% surge in Distribution, selling and administration expenses. However, expenses as a percentage of sales were 6.3% in the quarter compared to 9.0% during the same quarter in 2020.
• Improved Operating Margin: In Q2FY21, operating earnings were CAD 83.3 million compared to CAD 21.7 million in the comparative period of 2020, an increase of CAD 61.6 million, due to lower expenses as a percentage of sales.
• Improved Bottom Line: Net Earnings in Q2FY21 were CAD 53.1 million compared to CAD 12.7 million in the same quarter of 2020, an increase in earnings of CAD 40.4 million on a YoY basis.

Top-10 Shareholders

Top-10 shareholders together hold approximately 23.66% stake in the company, with Doman (Amardeip Singh) and Dimensional Fund Advisors, L.P. are the major shareholder with an outstanding position of approximately 18.88% and 1.13% respectively. Institutional holding stood at 6.14%.

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 reported solid performance in the second quarter of FY21, on the back of strong sales from the Building Materials segment, on the back of strong lumber prices.

Lumber prices witnessed large volatility over the last 3-month from peak of approximately USD 1,700 to bottom of approximately USD 440 per thousand board and now stabilizing near USD 660.

Further, despite a relative high debt contribution in the balance sheet, the company is having robust debt protection metrices which reduces the balance sheet risk for the company.

The company is generating industry leading ROE (Common Equity) of 32.7% which is significantly above the industry average of 13.9%.

From the technical standpoint, we believe that Bearishness is exhausting in the stock as on weekly price chart the momentum indicator 14-day RSI taking 40 support for last couple of weeks, indicates a potential upside from the current level.

Hence, we recommend a “Buy” rating at the closing price of CAD 6.90 (October 25, 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:

Technical Price Chart (October 25, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on October 26, 2021, price as well.

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Disclaimer

 

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