Canfor Pulp Products Inc.

Canfor Pulp Products Inc. (TSX: CFX) produces and distributes northern bleached softwood kraft pulp, or NBSK pulp and paper. The Company has two operating segments, namely, pulp and paper and derives the majority of the revenue from the pulp segment.

Q1FY20 Financial Highlights: Canfor Pulp Products Inc. announced its quarterly results, wherein the Company reported a lower sale of CAD 275.5 million, as compared to CAD 304 million in the previous corresponding quarter. The Company reported pulp production of 298,000 tones, reflecting an improvement of 4% on y-o-y basis, primarily supported by improved productivity and higher operating days. The quarter was marked by a higher pulp shipment of 23,000 tones, reflecting a growth of 9% over the previous corresponding quarter. Operating income stood at CAD 6.1 million compared to a loss of CAD 23.5 million in the previous corresponding period. Paper segment’s operating income stood at CAD 6.8 million, increased CAD 1.8 million from Q4FY19, underpinned by higher paper shipments of 31%, combined by higher paper production accompanied by lower paper unit manufacturing costs, offset by modestly lower paper unit sales realizations. The Company reported net income of CAD 7 million, as compared to a net loss of CAD 26.5 million in Q4FY19.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: The company procure most of the fiber from the Fibre Supply Agreements with Canfor group. The company’s financial results could adversely affect if Canfor is unable to provide the current volume of wood chips as a result of mill closures, whether temporary or permanent.

Valuation Methodology: EV to Sales based Relative Valuation (illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The Stock of CFX corrected ~32% so far this year, due to weak global pulp prices in the recent past. The company was able to increase its production and shipment in the first quarter due to higher demand from China. The company expects demand for the bleached kraft paper markets to be solid through the second quarter of FY20, which is encouraging and would support the top-line of the company. Further, demand from China is likely to pick up as it has resumed the economic activity, which is a key positive. As the countries are easing restrictions and allowing industrial activities, we believe the pulp demand to recover gradually along with stable tissue demand, which bodes well for the company. Amid the current challenging time, the company has lowered its FY20 capital expenditure by CAD 15.0 million to CAD 25.0 million, which would help in preserving liquidity. We have valued the stock using the EV to Sales based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). For the said purpose, we have considered peers like Western Forest Products Inc, Interfor Corp and Domtar Corp. Though we expect a demand recovery in the second quarter, a temporary shut down of facilities in the early part of 2QFY20 may hurt the production volume. Hence, considering the aforementioned factor and risk scenario, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 5.65 as on July 07, 2020.

CFX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Acadian Timber Corp

Acadian Timber Corp. (TSX: ADN) is a supplier of key forest products in Canada and the United States. The company is also engaged in owning and managing a forest nursery in New Brunswick.

Q1FY20 Financial Highlights: Acadian Timber Corp reported its quarterly numbers and posted sales of CAD 31.41 million, as compared to CAD 30.94 million in the previous corresponding period (pcp). The company witnessed favorable winter operating conditions and good demand and pricing. Operating earnings stood marginally lower at CAD 8.26 million compared to CAD 8.74 million in Q1FY19. The decline was primarily attributable to a higher cost of sales and a slightly higher selling, administration and other expense. Adjusted EBITDA stood at CAD 8.3 million as compared to CAD 8.9 million, a year ago, while adjusted EBITDA margin fell to 27% from 29% in pcp. The company reported a net loss of CAD 3.71 million, as compared to a net income of CAD 6.18 million. The slide in the bottom-line was primarily attributable to an unrealized exchange loss of CAD 8.2 million as compared to a profit of CAD 2.03 million in pcp. The company reported a cash balance of CAD 12.03 million, while total assets were reported at CAD 516.14 million at the end of the first quarter of FY20.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: A prolonged lockdown or further outbreak of the novel virus may result in staff shortages, affect customer demand, and increase government regulations or intervention. Any such scenario would negatively impact the company’s financial results and conditions

Stock Recommendation: The stock of ADN corrected ~12% so far this year due to a steep correction in the equity markets on account of weak investor’s sentiments. The group’s first-quarter results were not impacted by the COVID-19 pandemic. The forest products industry has been deemed essential in the regions where the group operates. The group stated that its key customers are experiencing a steady demand for products, such as specialty paper and tissue products, which is encouraging. The group has a decent balance sheet with long term debt to capital ratio of 27.6%. Further, the stock is offering a dividend yield of ~7.98%, which is lucrative considering the current interest rate environment and would appeal several income investors. On the valuation front, the stock is trading at a higher multiple compared to the industry. For example, the stock is trading at a forward EV/EBITDA multiple of 15.7x, and forward P/E multiple of 21.3x as compared to 7.8x and 14.8x of industry (paper & forest products) median, respectively. Hence, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 14.53 on July 7, 2020.

ADN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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