Doman Building Materials Group Ltd (TSX: DBM) is a wholesale distributor of building materials and home renovation products. The company services the new home construction, home renovation and industrial markets by supplying the retail and wholesale lumber and building materials industry, hardware stores, industrial and furniture manufacturers and similar concerns. 

Key Updates:

• Impressive Dividend yield: The Stock of DBM carries a dividend yield of ~7.398% on an annualized basis, which looks attractive considering the persisting interest rate scenario. Moreover, dividend payment in FY21 stood at CAD 42.6 million, which is slightly better than CAD 42.0 million in FY20. This is impressive as most of the companies are lowering dividend distribution in order to retain liquidity. Recently, the Board of Director paid a quarterly dividend of CAD 0.14 per share for the 48th consecutive quarter.

• Bullish Outlook: The management expects that the demand for the building material is likely to stay strong in FY22 as the governments in Canada and the US have identified investment in housing and infrastructure as a policy priority and a key source of economic stimulus. Additionally, The Group is focusing to execute its strategy to increase the proportion of value-added products, such as pressure treated wood, in its overall sales. This is likely to enhance the profitability margins in the coming days.

• Favorable Industry Dynamics: As per the US Census Bureau, seasonally adjusted housing starts stood at an average of 1,587,000 units in 2021, grew from 1,380,300 units in 2020. As per the estimates, the housing start is expected to reach 1,632,000 in 2022, due to persisting low mortgage rates, continuation of work-from-home practices, along with favorable demographics in the US. Moreover, residential repair and remodeling activities are expected to remain strong, due to an expected increase in the discretionary spending by the homeowners. We expect the company is highly poised to take advantage of the demand arising from the housing and construction industry.

• Result Update: The company will disclose its Q1FY22 results on May 03, 2022.

Risks Associated with the Investment:

The operation of the company might be hindered due to the impact of COVID-19 on residential construction and the economy, international tensions, ongoing trade disputes, supply and supply chain challenges etc.

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• DBM announced its full-year result, wherein the company posted its sales of CAD 2,543.6 million in FY21, significantly higher than CAD 1,613.8 million in FY20. The growth was supported by the positive impact of acquisitions coupled with improvements in product pricing.
• Gross margin from operations stood considerably higher at CAD 390.9 million, as compared to CAD 256.1 million in FY20, thanks to the elevated revenue as mentioned above, partially offset by an increase in cost of sales.
• On account of higher input costs such as salaries & benefits expense, higher building occupancy costs, and increase in office and miscellaneous, the group reported distribution, selling and administration costs of CAD 164.0 million in FY21, significantly higher than CAD 113.1 million in FY20. Depreciation & amortization expense also stood higher than previous year. Despite higher expenses as mentioned above, the company reported its operating earnings of CAD 219.1 million in FY21, as compared to CAD 157.8 million in FY20.
• Net earnings surged to CAD 106.5 million in FY21 from CAD 59.5 million in FY20, supported by elevated operating income, partially offset by higher finance costs and an increase provision for income taxes.

 Valuation Methodology (Illustrative): EV to Sales Based

Analysis by Kalkine Group

Stock Recommendation:

In FY21, the company has lowered its cash conversion period to 80.5 days from 98.8 days in FY20. This indicates that the company is taking lower time to convert its investments to cash flows. We valued the stock using the EV to Sales based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like Hardwoods Distribution Inc, KP Tissue Inc. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of DBM at the last closing market price of CAD 7.57 on April 19, 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 19, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary

Disclaimer

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