Stella-Jones Inc.

Stella-Jones Inc. (TSX: SJ) produces and sells lumber and wood products. The company sells products in five main customer categories. The railway ties category, which generates most of the revenue, sells pressure-treated lumber to the railway industry.

Key Highlights:

• Stable Dividend payment: During the last several years, the company has consistently distributed its dividend, backed by stable cash flows. In H1FY21, the company reported its dividend payment of CAD 24 million, higher than CAD 20 million in pcp.

Source: Company Presentation

• Strong traction from the residential lumber segment: The group reported strong growth from the residential lumber supported by the exceptional rise in the market price of lumber. The group reported its revenue of CAD 496 million in H1FY21, from the residential lumber category, as compared to CAD 328 million a year ago.

• Margin improvement: For H1FY21, the company reported its gross profit margin and EBITDA margin of 20.2% and 18.3%, respectively, as compared to 16.8% and 14.4%, respectively in the previous corresponding period (pcp). The above is impressive as it indicates higher operational efficiency.
  

Q2FY21 Financial Highlights:

• SJ announced its quarterly result, wherein the company posted Sales of CAD 903 million, as compared to CAD 768 million in the previous year. The growth was driven by higher demand from the company’s three core product categories, namely, residential lumber benefited from the unprecedented high market prices of lumber, utility poles benefited from increased volumes.
• Operating income stood at CAD 161 million, jumped from CAD 101 million in pcp, supported by an improved revenue, partially offset by higher cost of sales (CAD 742 million v/s CAD 667 million in Q2FY20).
• EBITDA stood at CAD 180 million, soared from CAD 120 million in pcp. EBITDA margin improved 440 bps to 20.0%.
• Net income for the period was recorded at CAD 115 million, jumped from CAD 69 million in the previous year.

Q2FY21 Income Statement highlights (Source: Company Report)

Risks: The company’s operations might be impacted due to lower commodity prices, currency volatility, high raw material costs, etc.

Valuation Methodology (Illustrative): Price to Earnings based

Stock Recommendation:

For FY21, the group expects its sales growth in the low-to-high teens on y-o-y basis. The management guided its EBITDA range to remain in between CAD 410 to CAD 440 million. Moreover, residential lumber sales are expected to grow by 15% to 20% in FY21, as compared to FY20, while railway ties and industrial products sales are projected to grow by a low-single-digit range. We have valued the stock using P/E based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Aecon Group Inc, IBI Group Inc etc. Considering the above-mentioned facts, we give a ‘Hold’ rating on the stock at the last traded price of CAD 44.24 on November 01, 2021.

One-Year Technical Price Chart (as on November 01, 2021) Source: REFINITIV, Analysis by Kalkine Group

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

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