Canfor Pulp Products Inc (TSX: CFX) produces and sells northern bleached softwood kraft pulp, or NBSK pulp and paper. The company also generates and sells electricity from biomass out of its pulp plants in Western Canada. The firm organizes itself into two segments based on product: pulp and paper. The pulp segment generates the majority of revenue.

Key highlights

• Robust financials: In Q3 2021, the Company reported higher revenue at CAD 298.9, compared to CAD 226.4 million in the previous corresponding period. Compared to the third quarter of 2020, average NBSK pulp unit sales realizations saw a substantial increase, as a notable uptick in demand and US-dollar pulp list pricing significantly outweighed the stronger Canadian dollar in the current period. It also made a net profit of CAD 12.1 million compared to a loss of CAD 18.1 million in pcp.

• High levels of new home construction activity: Strong performance continues, despite a little pull-back in the move to suburban regions as COVID-19 limitations were gradually eased, North American market fundamentals indicated continued high levels of new house construction activity. In Q3 2021, in Canada the total unit under Housing starts stood higher at 69.1 million against 62.9 million in Q3 2020, while the data of housing under construction was also on the higher side on both sequentially basis and on Y-o-Y basis, which is a key positive.

• Elevated operating cash flows: Cash generated from operating activities in the third quarter of 2021 was CAD 34.6 million, compared to cash used of CAD 16.4 million in the third quarter of 2020. The CAD 51.0 million increase in operating cash flows was principally driven by higher cash earnings and income tax refunds received in the current period.

Financial overview of Q3 2021

Source: Company

• In Q3 2021, the company posted strong revenue of CAD 298.9 million compared to CAD 226.4 million in the previous corresponding period. An increase in revenue was mainly due to higher pulp unit sales realizations and increase in shipments.
• Operating expenses for the reported period rose to CAD 283.1 million compared to CAD 254.0 million in pcp.
• On the back of robust revenue, the company’s operating income saw a substantial jump to CAD 15.8 million against a loss of CAD 27.6 million in pcp.
• Net income also rose to CAD 12.1 million against a loss of CAD 18.1 million in pcp, partially offset by higher income tax expense.

Risks associated with investment

The majority of the company’s revenue derived from the lumber segment, and a correction in the lumber prices would lead to lower realization, which may hinder the company’s cash flows and margins.

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

Canfor Pulp reported solid financial results for the quarter despite the growing pressures on global pulp market fundamentals, lower production volumes, which reflected its previously announced scheduled and unscheduled downtime, as well as significant supply chain challenges. Additionally, the company is focused on increasing its productivity going forward, which will be a key positive. Moreover, the Housing starts and housing under construction data in Canada in on the higher side, which reflects the positivity. Therefore, based on the above rationale and valuation methodology, we recommend a “Speculative buy” rating at the closing price of CAD 6.30 as on November 05, 2021. We considered Interfor Corp, Canfor Corp, Western Forest Products Inc, etc. as the peer group for the comparison.

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

Technical Analysis Summary

One-Year Technical Price Chart (as on November 05, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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