One Mid-cap Basic Material stock under the Radar - Stella-Jones Inc.

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:

• Growth from Residential lumber: In FY21, the company witnessed havoc growth from the residential lumber category and reported total sales of CAD 773 million in FY21, surged from CAD 665 million in FY20. The growth was supported by elevated lumber prices particularly during the first half of FY21, due to strong demand dynamics on account of higher construction activities within the US.
  

• Surge in Cash flows: In FY21, the company reported its cash from operations of CAD 251 million, which is significantly higher than CAD 178 million in FY20, supported by higher net profit in FY21. The increase in cash flows indicates better liquidity, which is a key positive.
  

• Impressive long-term guidance: The Management provided a three-year outlook, wherein anticipates continued growth in its sales and EBITDA, respectively. It expects to generate an annual sales growth rate of mid-single digit range from the 2019 pre-pandemic levels and expects its EBITDA margin of ~15% for the 2022-2024 period, slightly higher than FY21 EBITDA margin of 14.5%. Additionally, the group expects the lumber price is likely to be stabilize in the coming quarters, which is likely to support higher infrastructure-related activities from utility poles, railway ties and industrial product categories, and hence would support the company’s industrial segments as well.

• Increase in dividend distribution: The company’s board of directors announced a quarterly dividend of CAD 0.20 per share with a payment date of April 22, 2022, reflecting a growth of 11% from previous quarter. Notably, the company reported total dividend distribution of CAD 47 million in FY21, as compared to CAD 40 million in FY20.
  

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• SJ announced its full result, wherein the company posted Sales of CAD 2,750 million, as compared to CAD 2,551 million in the previous year. The surge was driven by 10% growth from the pressure-treated wood segment (comprise ~92% of the revenue) coupled with higher income from logs & lumber segment.
• Operating income improved to CAD 326 million in FY21 from CAD 309 million in FY20, supported by higher revenue coupled with impressive cost management.
• Net income for the period was recorded at CAD 227 million in FY21, stood higher than CAD 210 million in the previous year. This was due to a higher operating income and lower finance expenses, partially offset by slightly higher income taxes.

Risks associated with the Investment:

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

  Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock Recommendation:

In FY21, the company’s EBITDA stood at CAD 400 million, grew from CAD 385 million in FY20. This is impressive considering rising inflation and higher input costs scenario. We have valued the stock using EV to Sales 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. Considering the above-mentioned facts, we give a ‘Buy’ rating on the stock of SJ at the last closing price of CAD 38.37 on March 24, 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 on March 24, 2022). Analysis by Kalkine Group

Technical Analysis Summary

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