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 the most revenue of any category, sells pressure-treated lumber to the railway industry.

Key Highlights:

• Increased revenues: During Q1FY22, the company reported an increase in the total revenue to CAD 651 million as compared to the total revenue of CAD 623 million in Q1FY21. The utility poles segment reported the sales of CAD 254 million in the reported period (Q1FY22), which is higher than the sales of CAD 206 million in pcp, driven by maintenance demand, price hike, etc. the sales from railway ties segment stood at CAD 175 million in Q1FY22, versus the sales of CAD 158 million in pcp.

Source: Company presentation

• Improved outlook: The management is optimistic about the future growth trajectory and stated that utility poles, railway ties, and industrial products (infrastructure sales) to represent between 75% to 80% of the total sales by FY24. Further, the group expects the EBITDA margin close to 15% from FY22 to FY24.

Source: Company presentation

• Strong liquidity profile: The company reported the quick ratio for Q1FY22 at a higher level of 1.87x, as compared to the industry median of 1.60x. Further, the company’s current ratio was stated at 6.85x for the reported period (Q1FY22), which is higher than the current ratio of the industry median of 2.81x. The higher quick ratio and current ratio represent the company’s ability to meet its short-term obligations falling within one year time, without any hindrance, ensuring the smooth running of the business operations.

Source: Refinitiv, Analysis by Kalkine Group

• Sequential improvement in the margins: During Q1FY22, the company reported strong revenue numbers which were slightly offset by the increase in the cost of sales, which helped the group to improve its profitability margins sequentially, which are presented below.

Source: Refinitiv, Analysis by Kalkine Group 

Risks associated with investment

The company is vulnerable to slow down in the construction activity on account of any economic slowdown, rise in interest rates, etc. To add, the company could be impacted by volatility in commodity prices and currency rates too.  

Financial overview of Q1FY22 (Expressed in millions of CAD)

Source: Company Filing 

• During Q1FY22, the company reported an increase in its total revenues to CAD 651 million as compared to CAD 623 million in Q1FY21. The incremental sales were from the pressure wood of CAD 21 million, along with the benefits from the previous acquisitions, which overall pushed the revenue to a higher level in Q1FY22.

• The operating income declined to CAD 67 million in Q1FY22 when measured against CAD 82 million in pcp. The increase in the cost of sales to CAD 551 million in the reported period (Q1FY22) against CAD 511 million in pcp, partially offset the higher revenue, resulting in a lower operating income.

• For Q1FY22, the company reported a dip in the net income to CAD 46 million, against the net income of CAD 56 million in Q1FY21.
  

Valuation Methodology (Illustrative): Price/ Earnings based

Analysis by Kalkine Group

Stock Recommendation:

The group recently declared a quarterly dividend of CAD 0.20 per common share which is payable on June 22, 2022. The sales during Q1FY22 increased to CAD 651 million, against the revenue of CAD 623 million in Q1FY21. Further, the group estimated the  EBITDA margin approx 15% from FY22 to FY24. The liquidity ratios for the company,  such as the quick ratio stood at 1.87x which is higher than the industry median of 1.60. and the current ratio of the company was at 6.85x, which is also higher than the industry median of 2.81x, which is a key positive. On the valuation front, the stock is measured on the Price/ Earnings based relative valuation multiple and we have considered CCL Industries Inc., and Neenah Inc. as the peer group for the comparison.

Therefore, based on the above rationale, and valuation, we recommend a “Buy” rating on the stock of SJ at the last closing price of CAD 32.35 on June 17, 2022. Additionally, the 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 of June 17, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV 

Technical Analysis Summary

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.