Western Forest Products Inc

Western Forest Products Inc (TSX: WEF) is a Canada-based softwood forest products company. The company's principal business activities include timber harvesting, reforestation, forest management, sawmilling logs into lumber and wood chips, and value-added lumber remanufacturing. Its operating business segment comprised of Timber harvesting, Log sales, and Lumber manufacturing and sales.

The company informed that its third-quarter FY20 financial results would be disclosed on November 05, 2020.

Q2FY20 Financial Highlights: Western Forest declared its quarterly results, wherein the company posted a lower revenue of CAD 256 million, as compared to CAD 310 million in the previous corresponding period (pcp). A lower shipment of 28% at CAD 152 million on account sluggish lumber demand acted as a major headwind during the quarter coupled with Strike in certain British Columbia operations which dampened the overall performance. Furthermore, a 4% slide in the log segment revenue coupled with lower average price realizations due to a weaker sales mix took a toll on the overall revenue. Meanwhile, a 12% improvement in the lumber price, as compared to the previous corresponding period supported the Group’s top-line. Adjusted EBITDA stood at CAD 29.5 million, against CAD 15.1 million in pcp while, adjusted EBITDA margin stood significantly higher at 12%, compared to 5% in pcp. The improvement in the adjusted EBITDA and adjusted EBITDA margin was aided by improved employment costs supported by the Canadian Emergency Wage Subsidy program. WEF reported a net profit of CAD 8.5 million, as compared to a net loss of CAD 0.7 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risk: The income is co-related to the realization price of lumber and total shipment. Continuation of the ongoing restrictions would dampen the demand for lumber and logs. Furthermore, any interruption in logistics services would hamper the shipments and subsequently, the sales volume.

Valuation Methodology: EV to Sales Based (Illustrative)

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

Stock Recommendation: The quarter was marred by a tepid industry demand on account of weak consumer sentiment due to COVID 19. The company reported gradual recovery during the quarter with shipments accelerating in June 2020. The company reported growth in the wholesale lumber shipments from the previous corresponding period last year while the US-based Columbia Vista division continued to perform in line with the expectations. Demand for Niche lumber products, used for the treating segment in North America has remained strong, and the management expects an improvement in the price realization in the third quarter of FY20, which would support the company’s cash flow. COVID-19 related operating curtailments in Europe and New Zealand impacted log supply to China in the first half of this year. The group expect European and New Zealand log supply to return to pre-pandemic levels leading to a more competitive price environment. In the domestic log market, the group expect moderate price improvements supported by increased demand from local manufacturers. The stock made handsome gains of ~64% in the last six months. We have valued the stock using EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Paper & forest Products) median on NTM basis. Considering the aforesaid facts, and current price movement, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 1.0 on October 6, 2020.

WEF daily technical chart. Source: Refinitiv (Thomson Reuters)

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