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:

• Attractive Dividend yield: The Stock of DBM carries a dividend yield of ~7.799% on an annualized basis, which looks attractive considering the persisting interest rate scenario. Moreover, dividend payment in Q1FY22 stood at CAD 12.1 million, which is considerably higher than CAD 9.3 million in pcp. This is impressive as most of the companies are lowering dividend distribution in order to retain liquidity.

• Positive Macros: The management expects that the demand for the building material is likely to stay strong in FY22 as the government 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 ~1,753,000 units in Q1FY22, grew from ~1,605,000 units in the previous corresponding period. As per the estimates, the housing start is expected to remain stable in 2022, due to the continuation of work-from-home practices, along with favorable demographics in the US. Hence, residential repair and remodeling activities are expected to remain positive supported by an expected increase in the discretionary spending by the homeowners. We believe the company is highly poised to take advantage of the demand arising from the housing and construction industry.

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, and supply chain disruption etc. 

  Q1FY22 Financial Highlights:

   Q1FY22 Income Statement Highlights (Source: Company Report)

• In Q1FY22 the company posted its sales of CAD 851.3 million, significantly higher than CAD 519.9 million in pcp. The growth was supported by the strong momentum from Buildings Materials due to the positive impact of acquisition.
• Gross margin from operations stood considerably higher at CAD 132.6 million, as compared to CAD 90.3 million in Q1FY21, thanks to the elevated revenue as mentioned above, partially offset by an increase in cost of sales.
• The quarter was marked by an increase in distribution, selling and administration, along with a surge in the depreciation costs. The company reported its operating earnings of CAD 61.8 million in Q1FY22, as compared to CAD 49.6 million in pcp, supported by higher gross margin as mentioned above.
• Net earnings surged to CAD 42.0 million in Q1FY22, stood higher from CAD 34.1 million in pcp, supported by elevated operating income, partially offset by higher finance.

    Valuation Methodology (Illustrative): EV to Sales Based

     Analysis by Kalkine Group

Stock Recommendation:

The company reported an impressive working capital management and posted its quick ratio and current ratio of 1.43x and 3.20x, respectively, in Q1FY22, as compared to the industry median of 1.14x and 2.20x, respectively.  The company is focusing on improving its cash flow through continuous optimization of working capital, reduction of operating costs, minimizing capital expenditures etc. We have 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, Richelieu Hardware Ltd. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of DBM at the last closing market price of CAD 7.18 on May 06, 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 May 06, 2022). Source: REFINITIV, Analysis by Kalkine Group 

 Technical Analysis Summary

Disclaimer

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