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:

• New Acquisition update: Recently, the company reported the acquisition of Cahaba Timber, Inc at a price consideration of USD 36.5 million, which includes working capital of USD 4 million. The above company offers quality treated wood products like poles and pilings and engages in raw material procurement at its treating operations in Brierfield, Alabama. The above acquisition is expected to improve its product offerings within the pressure-treated wood segment and subsequently lead to better customer satisfaction.

• Rise in cash flows: In 9MFY21, the company reported total cash from operations of CAD 257 million, as compared to CAD 201 million, supported by higher net income. The above is impressive as it would support the company’s overall liquidity position.

• Decline in Total debt: The company showed prudent capital management and reduced its total debt to CAD 530 million in Q3FY21, 13% lower than Q4FY20. A decline in the total debt indicates higher financial efficiency. Additionally, the above would result in lower interest expense, which would subsequently result in higher profitability.

• Improved YTD performance: For 9MFY21, the company reported a higher income of CAD 2,205 million, reflecting a surge of 15% on y-o-y basis. The growth was supported by improved traction from the pressure-treated wood coupled with a rise in the market prices of lumber, resulting in improved realization price.

Q3FY21 Financial Highlights:

• SJ announced its quarterly result, wherein the company posted Sales of CAD 679 million, as compared to CAD 742 million in the previous year. 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, 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, declined 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, as compared to CAD 79 million in the previous year.

Q3FY21 Income Statement Highlights (Source: Company Report)

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

Valuation Methodology (Illustrative): Price to Earnings based

Stock Recommendation:

The company paid a higher dividend of CAD 35 million in 9MFY21, as compared to CAD 30 million, supported by stable cash flow generation. The above is impressive as most of the companies are lowering their dividend payment in order to retain their liquidity. We have valued the stock using P/E based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like SNC-Lavalin Group Inc, Stantec Inc etc. Considering the above-mentioned facts, we give a ‘Buy’ rating on the stock at the last traded price of CAD 39.17 on December 16, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on December 16, 2021) Source: REFINITIV, Analysis by Kalkine Group

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

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.