Acadian Timber Corp. (TSX: ADN), is a Canadian-based company with a major focus on supplying forest products across Eastern Canada and the Northern United States. The two main segments of its operations are Maine Timberlands and NB Timberlands.

Key Highlights

• Generous Dividend: The company declared total dividends of CAD 19.4 million, and on per-share basis of CAD 1.16 for the year 2021. In Q4FY21 the company declared a hefty dividend of CAD 4.83 million with a 94% payout ratio, to CAD 0.29 per share in absolute numbers. The current dividend yield of 6.11% for a small-cap company, makes it favorable for regular income-seeking investors. Even after shelling out such dividends, the company garnered enough liquidity in its balance sheet and reported CAD 19.8 million of net liquidity for the year ended 2021 which includes the credit facilities.

• Higher margins profile v/s Industry: In Q4 FY21, the company outperformed the industry median on the Profitability front by reporting an EBITDA margin of 22.8% as compared to the industry median of 17.6%. For a similar period, the Net Margin of the company was 23.9% vs the industry median of 10.3%. The strength company is depicted by outpacing the industry margins, demonstrating how well the synergies have bought into action.

Source: REFINITIV, Analysis by Kalkine Group

• Lower valuations: The stock is trading at a relatively lower valuation in terms of Price/ Cash Flow multiple of 1.8x compared to the industry (Basic Material) median of 4.3x and on Price / Book Value multiple it's trading at 1.1x against an industry median of 1.9x. These lower valuations give the margin of safety to the investors, and further scope for the stock to run up to match its peers.

Source: REFINITIV, Analysis by Kalkine Group 

Risks associated with investment

The company is vulnerable to supply chain disruptions in case any more curbs on the transportation of raw materials, distribution channels, etc. are imposed in near future, impacting the business operations. Further, the rising wages are putting upward pressure on the cost of operations which can dampen the margins on its books.

Key Financial Highlights

Financial overview of Q4 FY21

Source: Company Filings

• Increase in Revenue: The company reported an increase in revenue by 4.07% to CAD 25.94 million for the Q4FY21 as compared to the revenues of CAD 24.92 million in pcp. Despite the fall in sales volumes, the increase in sales revenues was primarily because of the increase in the weightage average selling price of its products excluding the biomass, along with improving operating efficiencies and the rise in sawlog prices.

• Decline in operating income: the company witnessed a decline in its operating income to CAD 6.16 million in Q4FY21 as compared to CAD 6.83 million in pcp, this decline was contributed by the rise in operating costs such as weightage average variable costs, higher fuel costs, etc.

• Adjusted EBITDA: The adjusted EBITDA was reported at CAD 6.3 million (CAD 0.39 per share) vs CAD 7.3 million (CAD 0.92 per share) in pcp.

Valuation Methodology (Illustrative): Price to Cash Flow

Analysis by Kalkine Group

Stock recommendation

The company rewarded its shareholders by delivering a positive return of 5.98% in the past six months and 6.57% in past one year. It performed well amidst the challenging environment by negating most of the headwinds in terms of supply chains, labor shortage, and dent in demand, which is reflected in the recent quarterly results for the FY21.

On the technical front, the stock moved gradually up in the past two years and after striking the lifetime high of CAD 21.57 in May 2021, the stock cooled off and established strong support at a higher base of CAD 17 levels. The two important trend deciding averages: 200 DMA & 50 DMA, just showed a cross over and from here if the prices sustain above the 200 DMA of CAD 18.69, can take the stock towards the North.

Considering the lower and affordable valuations for a dividend-paying stock, favorable technical chart patterns, and the lower volatility in the stock prices, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 18.96, as on February 16, 2022. For the valuations, the peers considered are Resolute Forest Products Inc., Mercer International Inc., Doman Building Materials Group Ltd., Western Forest Products Inc. to name a few.

1-Year Price Chart (as on February 16, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

Technical Analysis Summary:

Disclaimer

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