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.

• Impressive YTD performance: For 9MFY21, the company reported higher revenue of CAD 2,205 million, reflecting a surge of 9% on the y-o-y basis as compared to the 9MFY20 of CAD 2,018 million. The growth was supported by improved traction from the pressure-treated wood coupled with a rise in the market prices of lumber, resulting in an improved realization price.

• Surge in cash flows: In 9MFY21, the company reported total cash from operations of CAD 257 million, as compared to CAD 201 million, driven by higher net income. This is impressive, as it would support the company in carrying out the operational efficiency.

• Acquisition update: During Q4FY21, the company reported the acquisition of Cahaba Timber, Inc. at a price consideration of USD 36.5 million. Cahaba is a well-established producer of treated poles and pilings products and engaged in raw material procurement at its treating operations in Brierfield, Alabama. Notably, in FY20, Cahaba registered total revenue of USD 41 million.
  

Risks: The company’s operations might be impacted due to volatile commodity prices currency rates, high, labor demand shortage, high wages, etc.

Q3FY21 Financial Highlights:

Q3FY21 Income Statement Highlights (Source: Company Report)

• SJ announced its quarterly result, wherein the company posted Sales of CAD 679 million for Q3FY21, as compared to CAD 742 million in Q3FY20. The decline was primarily due to the negative impact of the currency conversion of ~CAD 24 million, coupled with a 5% y-o-y decline in revenue from residential lumber and sluggish performance from the railway ties segment.
• Operating income slide to CAD 51 million for Q3FY21, from CAD 113 million in pcp, due to lower revenue, partially offset by at par cost of sales (CAD 597 million v/s CAD 595 million in Q3FY20).
• EBITDA came at CAD 69 million for Q3FY21, declining from CAD 132 million in pcp. EBITDA margin stood lower at 10.2%, as compared to 17.8% in pcp.
• Net income for the period was recorded at CAD 34 million for Q3FY21, as compared to CAD 79 million in the previous year.

Valuation Methodology (Illustrative): Price to Earnings based

Analysis by Kalkine Group 

Stock Recommendation:

The acquisition of Cahaba Timber is likely to add to the company’s top-line, which is a key positive. Moreover, this would enhance the company’s ability to cater to the rising demand for the high-quality treated wood products across North America. 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, Calian Group Ltd etc. Considering the above-mentioned facts, we give a ‘Hold’ rating on the stock at the closing price of CAD 41.35 on February 08, 2022.

1-Year Price Chart (as on February 8, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

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