Norbord Inc.

Norbord Inc. (TSX: OSB) is a leading global manufacturer of wood-based panels and is a leading producer of oriented strand board (OSB). The Company also manufactures particleboard, medium density fiberboard and related value-added products. The Company has 17 facilities across the United States, Canada and Europe.

The Board of Directors declared a quarterly variable dividend of CAD 0.30 per common share, payable on September 21, 2020.

Q2FY20 Financial Highlights: OSB declared its quarterly results, wherein the Company reported marginally lower revenue at USD 421 million, as compared to USD 447 million in the previous corresponding period (pcp). The demand for oriented strand board was underpinned by improved traction from US new home construction activities during the month of June 2020. The demand was further aided by a strong performance from the repair-and-remodeling sector. Adjusted EBITDA, during the quarter soared to USD 84 million from USD 75 million in Q1FY20 and USD 36 million in Q2FY19. The significant increase from the previous quarter was aided by lower manufacturing costs, partially offset by lower shipment volumes. Meanwhile, the y-o-y growth was driven by higher realized North American oriented strand board (OSB) prices, coupled with a decline in the manufacturing costs, partially offset by lower shipment volumes. The Company posted net earnings of USD 18 million, as compared to a net loss of USD 14 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: A prolonged lockdown or second wave of the novel virus would hamper the demand for the group’s offerings and might affect the financial performance adversely.

Valuation Methodology: P/E Based (Illustrative)

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

Stock Recommendation: The stock of OSB gained ~46% in the last one year, outperforming the index by ~38%. The Company lowered its capacity utilization to ~35% due to a sink in demand on account of the soft economic outlook. Meanwhile, the Business witnessed a pick-up in demand and started resume production across its North American and European mills, which is a key positive. Further, to improve its operational efficiency, the Management would implement a flexible operating strategy to adapt production as per the current demand, which augers well to reduce operating costs. To ensure proper liquidity, the Company extended the maturity of its revolving bank lines to May 2022 and increased aggregate commitment from USD 245 million to USD 300 million, which would support the working capital requirements. The Company implemented Margin Improvement Program (MIP) and reported a gain of CAD 34 million on year-to-date due to improved mill productivity and lower controllable manufacturing and overhead costs, which is encouraging. The stock soared ~73% in the last three months and were trading above the 200-days simple moving average of CAD 31.86, indicating a bullish trend. We have valued the stock using the P/E based relative valuation approach and arrived at a target price, which suggests a high single-digit upside potential (in % terms). For the said purpose, we have considered peers like Canfor Pulp Products Inc, Interfor Corp and Canfor Corp etc. Hence, considering the aforesaid facts, current price movement, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 41.03 on August 05, 2020.

OSB 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. The firm has roughly 2.4 million acres of land under management and has operations in New Brunswick and Maine. The majority of the income is generated from New Brunswick.

Q2FY20 Financial Highlights: ADN announced its quarterly results, wherein the company witnessed a significant challenge due to a weak seasonal operating condition, combined with relatively dry and hot weather that led to an extreme fire risk and operating restrictions. The quarter saw a delay in the wood deliveries due to COVID 19 interruptions. Revenue, during the second quarter, slumped to CAD 11.458 million from CAD 17.918 million in prior corresponding period (pcp), primarily attributable to a significantly lower sales volume of 139.7 thousand m3   as compared to 214 thousand m3   in the previous corresponding quarter. However, weighted average log selling price, excluding biomass, stood relatively stable with a 1% decrease on y-o-y basis. Adjusted EBITDA declined to CAD 1,354 million from CAD 3,038 million in Q2FY19. The company reported lower operating costs and expenses at CAD 10.2 million during the second quarter as compared to CAD 15.4 million during the prior corresponding period, reflecting the lower harvest volumes. Net income stood CAD 5.2 million, at par with CAD 5.8 million in pcp, supported by higher gains on non-cash items.

Q2FY20 Financial Snapshot (Source: Company Reports)

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

Stock Recommendation: The stock corrected ~3% so far this year. In the recent past, the business witnessed a fall in demand for timber and related products delay in the construction activities. However, the Management anticipates a revival of the demand, aided by the gradual recovery of the economic activities in the coming days. The group expect steady demand for its products in New Brunswick, with some weakness in Maine, as mills continue to work through higher than usual winter inventories. The softwood sawtimber market is expected to remain stable. Hardwood sawtimber markets are relatively weak due to soft demand for high-end, appearance grade lumber, compared to relatively robust demand for low-end, industrial grade products. Pulpwood markets are expected to strengthen as winter inventories are depleted, particularly in Maine. 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 16.6x, and forward EV/Sales multiple of 3.9x as compared to 6.4x and 0.7x of industry (paper & forest products) median, respectively. Hence, considering the aforesaid facts, current price movement, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 16.07 on August 05, 2020.

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.