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. The portfolio of the firm consists of engineered wood products, fasteners, insulation, outdoor living products, and others. Its operating segments are Building Materials Distribution and Forestry. The majority of the revenue is generated from the building materials distribution segment. Geographically, it operates in the region of Canada and the Western United States of which Canada regions account for larger revenue share.

Investment Rationales

• Consistent dividend distribution: Given the strength of a business over the past number of quarters, improved cost structure, strong balance sheet and solid cash flow, the company has paid a consistent dividend. It has been 45 consecutive quarters that the company is distributing dividend, which is noteworthy.

• An income play: On April 15, 2021, the company paid a CAD 0.12 per share quarterly dividend, as well as a special dividend of CAD 0.04 per share in its first quarter. Recently, it declared a dividend of CAD 0.12 per share, which will be paid on July 15, 2021. Moreover, at the last closing price, the stock was offering a dividend yield of 5.6%, which is lucrative considering the current macros and interest rates.

• Rising demand for construction materials: Consumers spent more time and effort on home renovation and repair projects, and new house building activity surged as a result of quarantine-related home improvement activities and high housing starts. Moreover, throughout the first quarter of 2021, the cost of building materials continued to rise. The company is also sticking to its plan to expand the amount of value-added items in its overall sales, such as pressure-treated wood.

• Healthy housing starts:The seasonally adjusted annualized rate for overall Canadian housing starts grew by 45.6% to 296,174, in Q1 2021, against 203,433 in Q1 2020, and the seasonally adjusted annualized rate for single-detached units increased by 53.6% to 96,035 against 62,538 for the same period. The identical trend was witnessed in the US housing starts, which witnessed an increase of 8.5%. We believe that higher housing starts is a positive aspect for the company. Furthermore, according to the Canada Mortgage and Home Corporation (CMHC), housing starts in Canada increased 3.2% month over month to 275,916 units in May 2021, above market forecasts of 270,000 units. The SAAR for urban starts increased by 1.8% to 254,647 units, with multiple urban starts up 10.9% to 190,530 units. All this information reflects optimism, which is beneficial to the firm.

Data Source: CMHC

• Elevated construction material prices:The prices of lumber, plywood, and oriented strand board (“OSB”) experienced unprecedented increases in the second half of 2020 and during the first quarter of 2021, primarily impacted by a combination of limited supply and elevated demand. Production curtailments by major producers earlier in 2020 contributed to low supply chain inventory levels, while home construction activity and the repair and remodel market remained strong. We believe that these elevated prices would further enhance the margins for the company, which is appreciable. The following table provides average quarterly pricing for lumber, plywood and oriented strand board (“OSB”) per thousand board feet.

Source: Company

• Acquires Hixson Lumber Sales: Recently, on June 4, 2021, the Company announced the acquisition of Texas-based Hixson Lumber Sales (“Hixson”), a leading wholesale and manufacturing company of lumber and treated lumber operating in the Central United States. It acquired all the assets of the “Hixson” for approximately USD 375 million in cash, including inventory. We believe the transaction would facilitate the company’s growth and would expand its product suite to include new offerings.

• Robust Q1 2021 performance: The company reported decent performance in Q1 2021, with revenue surged by 59.1% to CAD 519.9 million, Adjusted EBITDA improved by 264.2% to CAD 60.1 million compared to CAD 16.5 million, and net earnings rose massively to CAD 34.2 million, against CAD 0.9 million on a YoY basis. The company is witnessing strong demand and robust pricing across its business platform. With this unprecedented level of activity in its end markets, the company would continue to maximize its cost and operational efficiencies to drive solid margins and value.

• Industry beating margins: The management’s solid determination and cost saving strategies helped them leaping the industry median margins on many fronts in Q1 2021, which is a key positive. Although the EBITDA margin of the industry median was slightly higher than the company. The chart below gives a glimpse of this.

• Improving operating matrix: Despite the turmoiled period in 2020, the Company raised its pace and witnessed spirited performance across its gross margin, EBITDA margin, operating margin and net margin. The Company concentrates on cash flow, which includes optimizing working capital, lowering operational expenses, and reducing capital expenditures. We expect the current trend to continue in the near future, as a robust demand for new home starts will fuel future growth.

• Risks associated with investment: The Company is exposed to risks related to wood product prices, forestry operations, harvesting activities, liquidity risk, currency risk, interest rates risk and credit risk. The Company’s overall business could be impacted due to changes in government policies and regulations along with the demand from the housing starts. Any decline in housing starts could impacts the company’s cash flows.
  

Financial overview of Q1 2021 (In thousands of Canadian dollars) 

Source: Company

• In Q1 2021, the Company reported sales of CAD 519.9 million compared to CAD 326.7 million in the comparative period in 2020, representing an increase of CAD 193.2 million or 59.1%. The increase in sales was attributable to improvements in both sales volumes and pricing.
• The Company sales by product group in the quarter were made up of 72% construction materials, compared to 62% in 2020, with the remaining balance resulting from specialty and allied products of 23%, and forestry and other of 5%.
• The gross margin in Q1 2021 increased to CAD 90.3 million compared to CAD 43.4 million in the previous corresponding period. The gross margin percentage improved to 17.4% in the quarter, increasing from the 13.3% achieved in the same quarter of 2020. The Company’s margins benefited mainly from the improvements in construction materials pricing during the first quarter of 2021 and the ongoing implementation of its strategies. 

• Total operating expenses in Q1 2021, reported by the Company, increased slightly to CAD 40.7 million compared to CAD 37.2 million in the previous corresponding period. The expenses rose mainly due to higher distribution, selling and administration expenses, which increased to CAD 30.4 million against CAD 26.9 million in pcp.

• In the reported period, the operating earnings enhanced to CAD 49.7 million compared to CAD 6.2 million in the comparative quarter of 2020. The increase of CAD 43.5 million was mainly due to the higher sales and gross margins.
• The Company minimized its finance cost by 29% in Q1 2021, which stood at CAD 3.5 million compared to CAD 5.0 million in the previous corresponding period. Through continued disciplined balance sheet optimization and working capital management strategies, it reduced its total loans and borrowings by CAD 2.8 million to CAD 384.3 million.

• The Company posted a net income of CAD 34.1 million against CAD 0.85 million in the previous corresponding period. This enhancement in the bottom line of the Company was mainly due to the factors discussed above.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 23.46% of the total shareholding. Doman (Amardeip Singh) and Dimensional Fund Advisors, L.P. hold the maximum interests at 18.90% and 1.03%, respectively. The institutional ownership in the company stood at 5.26%, and ownership of the strategic entities stood at 20.11%.

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

Despite the challenging global economic conditions resulting from the Pandemic, demand for residential building materials in Canada and the US has been much stronger than was expected when the Pandemic was first declared in March 2020. As a result, the Company has benefited significantly from quarantine-related home improvement activities and an increased interest in single-family detached housing. For Q1 2021, the consolidated revenues increased by 59.1% to CAD 519.9 million, compared to CAD 326.7 million in the previous corresponding period.

Moreover, the housing starts in Canada rose 3.2% over a month earlier to 275,916 units in May of 2021, above market expectations of 270,000 units, according to Canada Mortgage and Housing Corporation (CMHC), is also a big positive, which reflects the positive trend in continuation. The Company also sees strong demand and robust pricing across its business platform.

Given the strength of a business over the past number of quarters, improved cost structure, strong balance sheet and solid cash flow, the Company has paid a consistent dividend. It has been 45 consecutive quarters that the Company is distributing dividend, which is encouraging from an income investor's point of view. Moreover, the stock offers a dividend yield of 5.6%, which is lucrative amid a low-interest-rate environment.

Therefore, based on the above rationale and valuation, we suggest a "Buy" recommendation on the stock at the closing price of CAD 8.52 on June 21, 2021.

     

One-Year Technical Price Chart (as on June 21, 2021). Analysis by Kalkine Group

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

*Recommendation is valid at June 22, 2021 price as well.

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Disclaimer

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