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 Highlights:

• Improved profitability margins: The company’s operations were benefited from elevated international commodity (lumber) prices, better revenue mix, improved maintenance demand for distribution poles and higher sales volumes (high-margin product) of the fire-resistant wrapped poles. The above resulted in an EBITDA and operating margin of 18.3% and 15.9%, respectively in H1FY21, which was higher than 14.4% and 11.4% in pcp.
• Bullish outlook: For FY21, the company expects its sales growth in the low-to-high teens as compared to FY20. The company expects its EBITDA to be in the range of CAD 410 to CAD 440 million. Notably, residential lumber sales are expected to grow by 15% to 20% in FY21, as compared to FY20, while railway ties and industrial products sales are projected to increase in the low-single-digit range.
• Strong traction from the Logs and lumber segment: The group reported strong growth from the Logs and lumber segment in the recent past, supported by higher pricing coupled with higher volumes. In Q2FY21 and H1FY21, income from the above product category stood CAD 85 million and CAD 150 million, respectively, as compared to CAD 23 million and CAD 52 million, respectively in Q2FY20 and H1FY20.

Q2FY21 Financial Highlights:

• SJ announced its quarterly result, wherein the company posted Sales of CAD 903 million, as compared to CAD 768 million in the previous year. The increase was aided by the growth from the company’s three core product categories, namely, residential lumber benefited from the unprecedented high market prices of lumber, utility poles benefited from increased volumes.
• Operating income stood at CAD 161 million, jumped from CAD 101 million in pcp, supported by an improved revenue, partially offset by higher cost of sales (CAD 742 million v/s CAD 667 million in Q2FY20).
• EBITDA stood at CAD 180 million, as compared to CAD 120 million in pcp. EBITDA margin improved 440 bps to 20.0%.
• Net income for the period was recorded at CAD 115 million, jumped from CAD 69 million in the previous year.

Q2FY21 Income Statement Highlight (Source: Company Report)

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

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

In H1FY21, the group reported an increase in the dividend payment, backed by stable cash flows. Meanwhile, SJ reported the 17th consecutive year of dividend increase. Notably, dividend distribution in H1FY21 stood at CAD 24 million, higher than CAD 20 million in pcp. 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 Western Forest Products Inc, Canfor Pulp Products Inc etc. Considering the above-mentioned facts, we give a ‘Hold’ rating on the stock at the closing price of CAD 43.54 on September 29, 2021.

One-Year Technical Price Chart (as on September 29, 2021) Source: REFINITIV, Analysis by Kalkine Group

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

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