Stella-Jones Inc. (TSX: SJ) produces and sells lumber and wood products. The company sells products in five main customer categories. The railway ties category, which generates the most revenue of any category, sells pressure-treated lumber to the railway industry.

Key Investment Rationale:

• Consistent Growth from the Pressure Treated Wood segment: Over the years, the company’s reported remarkable growth from the pressure-treated segment (derives ~92% of revenue), supported by the growing usage across the industrial, marine, civic railway bridges and construction segments across the North America. Moreover, in FY21, the company acquired Cahaba Pressure Treated Forest Products, Inc., which distributes and sells treated and untreated wood poles, crossties and posts and also provides custom treating services. This would boost the company’s capacity and would further support the growth opportunities within the pressure-treated segment. Notably, the company reported its highest-ever revenue and profitability in FY21, which is encouraging.

Source: Company Presentation

• Bullish Long-term Guidance: The Management provide three-year outlook, wherein it anticipates continued growth in its sales and EBITDA, respectively. It expects to generate an annual sales growth rate in mid-single digit range from the 2019 pre-pandemic levels and expects EBITDA margin of ~15% for the 2022-2024 period, slightly higher than FY21 EBITDA margin of 14.5%. Additionally, the group expects the lumber price to stabilize in the coming quarters, which is likely to result in higher infrastructure-related activities across the utility poles, railway ties and industrial product categories. This would further support the company’s upcoming sales volume as well.

• Growth from Residential Lumber: In FY21, the company witnessed havoc growth in the residential lumber category and reported total sales of CAD 773 million, surged from CAD 665 million in FY20. The increase was aided by elevated lumber prices, particularly during the first half of FY21, due to strong demand dynamics on account of higher construction activities within the U.S.

• Decent Performance from the Utility Poles Segment: The company derives ~34% revenue from the Utility poles segment, which reported its income of CAD 925 million in FY21, compared to CAD 888 million in FY20. The growth was supported by the positive contribution from the acquisition of Cahaba Pressure and Cahaba Timber, while this segment reported an organic growth of 9% on y-o-y basis. This was driven by strong maintenance demand for distribution poles, along with a favorable sales mix, and higher sales volumes from the fire-resistant wrapped pole segment. However, this growth was partially offset by a slide in project-related volumes.

• Increase in Dividend Distribution: The company’s board of directors announced a quarterly dividend of CAD 0.20 per share with a payment date of April 22, 2022, reflecting a growth of 11% from the previous quarter. Notably, the company reported total dividend distribution of CAD 47 million in FY21, higher than CAD 40 million in FY20. For FY22, the company expects its dividend per share of CAD 0.80, higher than CAD 0.72 per share in FY20. Since 2013 to 2022E, the company is expected to report its dividend growth of 16.7% on a CAGR basis, backed by stable cash flows.

Source: Company Presentation

• Surge in Cash Flows: In FY21, the company reported its cash from operations of CAD 251 million, which is significantly higher than CAD 178 million in FY20, supported by higher net profit in FY21. The increase in cash flows indicates better liquidity, which is a key positive.

Risks associated with the Investment:

The company’s operations might be impacted due to lower commodity prices, currency volatility, high raw material costs, etc.

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• Elevated Top-line: SJ announced its full result, wherein the company posted Sales of CAD 2,750 million, as compared to CAD 2,551 million in the previous year. The surge was driven by 10% growth from the pressure-treated wood segment (comprise ~92% of the revenue) coupled with higher income from logs & lumber segment.
• Higher Operating Income: The group reported its operating income at CAD 326 million in FY21 from CAD 309 million in FY20, supported by higher revenue, partially offset by a slightly higher cost of sales.
• Increase in the Net income: Net income for the period was recorded at CAD 227 million in FY21, which stood higher than CAD 210 million in the previous year. This was due to a higher operating income and lower finance expenses, partially offset by slightly higher income taxes.

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 52.92% stake, Caisse de Depot et Placement du Quebec, Mawer Investment Management Ltd. are the major shareholders in the company with an outstanding position of 12.08% and 10.35%, respectively.

Source: REFINITIV, Analysis by Kalkine Group

  Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation:

In FY21, despite the hinderance from the pandemic, the group delivered an impressive FY21 performance, with a healthy financial position, providing a solid foundation to generate continued profitable growth in the coming years. Notably, the company’s EBITDA stood at CAD 400 million, which grew from CAD 385 million in FY20. This is impressive considering rising inflation and higher input costs scenario. The group is focusing on solidifying its leadership position within its core product categories and expects a sustainable demand from the infrastructure and construction segments within the North America to boost the upcoming performance of the company.

We have valued the stock using EV to Sales based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Stantec Inc, TFI International Inc etc. for this purpose. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of SJ at the last closing price of CAD 37.63 on April 08, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on April 08, 2022). Analysis by Kalkine Group

*Recommendation is valid on April 11, 2022, price as well.

   Technical Analysis Summary

Disclaimer

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