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 Updates:

• Favorable Industry demand: Within the railway ties segment, the group expects sustained maintenance and replacement demand for the next two to three years, which would contribute to improved profitability due to favorable revenue mix. Moreover, within the residential lumber segment, the company expects strong growth due to new home construction and home renovations across the North America region. Within the utility poles business, SJ expects infrastructure investments to drive demand and profitability from higher volumes and pricing. The management expects organic growth from increased maintenance demand and the sale of fire-resistant wrapped poles.
  

• Robust Performance from the Utility Poles Segment: The company derived ~39% revenue from the Utility poles segment, which reported its income of CAD 254 million in Q1FY22, compared to CAD 206 million in pcp. The growth was supported by the positive contribution from the acquisition of Cahaba Pressure and Cahaba Timber the company witnessed strong maintenance demand for distribution poles, along with a favorable sales mix, and higher sales volumes from the fire-resistant wrapped pole segment.

• Healthy performance from the Railway ties segment: The group’ performance was boosted due to the favorable realization prices within the railway ties segment. This segment contributed ~27% of the total revenue in Q1FY22. Total revenue from this segment stood at CAD 175 million in Q1FY22, which is 11% higher over previous corresponding period.

Risks associated with the Investment:

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

    Q1FY22 Financial Highlights:

 Q1FY22 Income Statements Highlights (Source: Company Reports)

• SJ announced its first quarter result, wherein the company posted its sales of CAD 651 million, as compared to CAD 623 million in pcp. The increase in sales was driven by strong organic growth across the infrastructure-related businesses, namely utility poles, railway ties and industrial products.
• The company reported a higher cost of sales of CAD 551 million, which is higher than CAD 511 million in pcp. Selling and administrative expense stood slightly higher than the previous corresponding period. Operating income stood lower at CAD 67 million, as compared to CAD 82 million in pcp, due to the higher input costs as mentioned earlier.
• Net income stood at CAD 46 million, as compared to CAD 56 million in pcp. The decline was primarily due to lower operating income, partially offset by lower income taxes.
  

    Valuation Methodology (Illustrative): Price to Earnings based

 Analysis by Kalkine Group

Stock Recommendation:

The company has lowered its cash cycle days to 230.3 days in Q1FY22, as compared to 249.4 days in Q4FY21. This is impressive as it suggests that the company is taking lower time convert its investments to cash flows. We have valued the stock using Price to Earnings based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Stantec Inc, TFI International Inc etc. for this purpose. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of SJ at the last closing price of CAD 35.54 on May 18, 2022. 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 May 18, 2022). Analysis by Kalkine Group

The reference data has been partly sourced from REFINITV 

  Technical Analysis Summary

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