Doman Building Materials Group Ltd (TSX: DBM), formerly CanWel Building Materials Group Ltd is a wholesale distributor of building materials and home renovation products. It primarily serves new home construction, home renovation, and industrial markets, as well as provides its building products to dealer/lumberyard and home improvement centers.

Key highlights

• Consistent dividend distribution: The company has paid a steady dividend based on the performance of the business over the last few quarters, better cost structure, robust balance sheet, and excellent cash flow. The company's quarterly dividend has recently been increased to CAD 0.14 per share, which will be paid on January 14, 2022.  Furthermore, the stock has a solid dividend yield of 7.746%, which appears to be fair considering current macroeconomic conditions and interest rates.

• Strategically Hedging Commodity Prices: Management is putting in place procedures to mitigate the effects of future building material price volatility. These strategies include using vendor managed inventories, direct shipments from the manufacturer to the customer, lumber futures contracts, and the Company's internal policy of optimizing inventory levels to maintain its high level of customer service while minimizing excess inventory that would otherwise be exposed to market fluctuations.

• Competitive Pricing Strength: The group prices its products in the competitive construction materials market so that profitability is based on cost plus value-added services such as wood pressure treating, distribution, short-term financing, and other services provided, giving the company a significant competitive advantage over its competitors.

• Acquires Hixson lumber sales:Recently, on June 4, 2021, the Company announced the acquisition of Texas-based Hixson Lumber Sales (“Hixson”), a leading wholesale and manufacturing company of lumber and treated lumber operating in the Central United States. It acquired all the assets of the “Hixson” for approximately USD 375 million in cash, including inventory. We believe the transaction will facilitate the Company’s growth and would expand its product suite to include new offerings.
  

Financial overview of Q3 2021

Source: Company

• In Q3 2021, the company posted higher revenue of CAD 625.2 million against CAD 472.1 million in the previous corresponding period, mainly because of increase in sales for the Building Materials segment by CAD 151.2 million.
• In the reported quarter the company witnessed elevated expenses at CAD 63.5 million as compared to CAD 40.6 million for the same quarter in 2020, an increase of CAD 22.8 million or 56.0%.
• Due to elevated expenses the group’s operating profit fell at 17.1 million compared to CAD 46.1 million in pcp.
• Higher finance cost at CAD 8.6 million along acquisition cost dented the group net earnings to CAD 7.6 million against CAD 31.0 million, which was partially supported by income tax recovery.
  

Risks associated with investment

The Company’s overall business could be impacted due to changes in government policies and regulations along with the demand from the housing starts. Any decline in housing starts could impacts the company’s cash flows. 

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Stock recommendation

Lumber prices witnessed large volatility over the last 3-month from peak of approximately USD 1,700 to bottom of approximately USD 440 per thousand board and now stabilizing near USD 660. Moreover, the seasonally adjusted annualized rate for overall Canadian housing starts for the quarter ended September 30, 2021, was 263,254, versus 237,567 in the comparative period of 2020, an increase of 10.8%. the same trend was witnessed in U.S with an increase of 8.7%. The Company sees strong demand and robust pricing across its business platform, which is a key positive. Even the stock is offering a healthy dividend yield of 7.746%, a decent amid a low-interest-rate environment, which is a key aspect for the long-term investors. Therefore, based on the above rationale and valuation, we suggest a "Buy" recommendation on the stock at the closing price of CAD 7.23 on November 16, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Summary Analysis

1-Year Price Chart (as on November 16, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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