Stella-Jones Inc

Stella-Jones Inc (TSX: SJ) produces and sells lumber and wood products. The company sells products in five main customer categories viz: railway ties, utility poles, residential, lumber industrial, and logs and lumber. The firm organizes itself into two segments based on geography: the United States and Canada. The majority of revenue comes from the United States.

Key Highlights:

• Stable Financial Growth: The company has showcased a continuous growth in its revenue, profitability and cash flows over the last ten years. The products of the company are used extensively by several retail and public entities.

Financial Metrics (Source: Company Reports)

• A Decline in lumber costs: The company’s profitability and margin are likey to be supported by lower lumber costs. Currently, the costs related to lumber production stood below its FY18 levels, while on the other hand, the company has enhanced its sales during the period, which has led to an improvement in the company’s performance. During YTD Q3FY20, the company posted an improved EBITDA margin of 15.6%, as compared to 14.6% in the previous corresponding period.

Source: Company Presentation

• Stong Growth from Utility Poles and Residential Lumber Segment: The company derives its majority of the revenue from Utility Poles, while the primary growth drivers being growth in replacement demand from the increasing average age of poles. During the first nine months of FY20, the company posted organic growth of ~12% from Utility Poles segment, while the company posted 33% y-o-y organic growth from Residential Lumber segment, driven by higher demand from board feet of treated residential lumber across Canada and the United States.

Segment Highlights (Source: Company Reports)

Q3FY20 Financial Highlights:

• SJ announced its quarterly results, wherein the company posted strong top-line and bottom-line growth, driven by strong traction from residential lumber (up 39% to CAD 220 million), Industrial product (grew 75% to CAD 49 million) and Utility poles (up 15% to CAD 250 million).
• Revenue stood at CAD 742 million, significantly higher from CAD 631 million in the previous corresponding period (pcp).
• EBITDA soared to CAD 132 million, as compared to CAD 96 million in Q3FY19, while EBITDA margin improved to 17.8%, from 15.2% in pcp.
• Net income stood higher at CAD 79 million, as compared to CAD 54 million in Q3FY19.

Q3FY20 Financial Highlights (Source: Company Reports)

Risks: The company is susceptible to a variety of risks including general economic and business conditions, including the impact of the outbreak of the coronavirus pandemic, evolution in customer demand, product selling prices, availability and cost of raw materials, changes in foreign currency rates, and the ability to raise capital.

Valuation Methodology (Illustrative): Price to Earnings based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Due to stable organic growth, the stock of SJ grew ~37% and ~15%, in the last six months and one-year, respectively. With the gradual reopening of the economy, we believe the demand for the industrial products and construction items would remain elevated in the foreseeable future, which would fuel the demand dynamics of the company’s products. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a target upside of single-digit (in percentage terms). For the said purposes, we have considered peers like Stantec Inc, IBI Group Inc etc. Hence, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 42.79 on November 12, 2020.

SJ one-year daily chart. Source: Refinitiv (Thomson Reuters)

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