Stella-Jones Inc. (TSX: SJ) is a leading producer and marketer of pressure-treated wood products. The Company supplies North America’s electrical utilities and telecommunication companies with utility poles and the continent’s railroad operators with railway ties and timbers. It also manufactures and distributes residential lumber and accessories to retailers for outdoor applications and industrial products for construction and marine applications.

Key Highlights 

• Consistently growing financials: The company's income and profitability have continued on an upward trajectory throughout the years, owing to a good business plan. In FY21, sales and net income increased to CAD 2,750 million and CAD 227 million, respectively, from CAD 2,551 million and CAD 210 million in FY 2020. While an EBITDA also showcased the stellar performance in the same period.

Source: Company, Analysis by Kalkine Group 

• Elevated cash from operations: The company's ability to generate steady cash from operation over a long period of time is commendable. In FY 2021, the company reported cash from operations at CAD 251.0 million, up by 41% from CAD 178 million in FY 2020, thanks to strong operational performance, a healthy contribution from recent acquisitions and increased revenues.

Source: Company, Analysis by Kalkine Group 

• Reaffirmed guidance for next couple of years: The Company expects annual revenue growth in the mid-single digits from pre-pandemic levels in 2019 and maintains a target EBITDA margin of around 15% for the period 2022-2024.

• Trying to maintain the positive tempo: The Company anticipates ongoing development in its infrastructure-related operations, especially utility poles, railway ties, and industrial goods, during the next three years. It aims to fully use the increased capacity gained from its most recent acquisitions, Cahaba Pressure Treated Forest Products, Inc. and Cahaba Timber, Inc., as well as anticipated future capital expenditures, to meet the expanding demand of its infrastructure-related client base.
  

Risks associated with investment 

The company’s operations might be impacted due to lower commodity prices, currency volatility, high raw material costs, etc. Additionally, the international lumber prices have witnessed a massive rally recently, that drove prices to a 10-month high of USD1,480 earlier this month. Any correction in the prices could drag the company’s EBITDA margin.

Financial overview of FY 2021 (in millions of Canadian dollars)

Source: Company Filing

• Sales in FY 2021 reached to CAD 2,750 million, up by 8% compared to sales of CAD 2,551 million in FY 2020, despite a CAD 127 million negative impact from currency conversion. The increase in sales was driven by organic growth across all product categories.

• Operating income surged to CAD 326 million from CAD 309 million in pcp, supported by an improved revenue, while the higher cost of sales remained a drag.

• Net income for the period recorded by the company stood at CAD 227 million, higher than CAD 210 million in the previous year, partially offset by higher income tax expense.

Valuation Methodology (Illustrative): EV to EBITDA based

Analysis by Kalkine Group

Stock recommendation 

Stella-Jones delivered a record performance on many fronts in 2021, resulting in increased sales, strong EPS growth and solid cashflows. The company’s expertise and longstanding industry relationships successfully navigated it through complex procurement challenges and volatile lumber markets to produce yet another successful year, which is a significant plus.

Looking to the next 3 years, the group will focus on pursuing acquisitions to complement its infrastructure-related product offering and invest to increase capacity in utility poles production to meet anticipated growth in demand. Furthermore, it expects annual revenue growth in the mid-single digits from pre-pandemic levels in 2019 and maintains a target EBITDA margin of around 15% for the period 2022-2024. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 39.27 as on March 9, 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 on March 9, 2022). Source: REFINITIV, Analysis by Kalkine Group 

  Technical Analysis Summary

Disclaimer

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