Acadian Timber Corp. (TSX: ADN) is a Canada-based supplier of primary forest products in Eastern Canada and the Northeastern United States. The company's operating segments include NB Timberlands and Maine Timberlands.

Key Highlights:

• Increase in sales volumes: During Q1FY22, the company reported an increase in the total sales volume to 0.30 million cubic meters against the total sales of 0.29 million cubic meters in Q1FY21. The New Brunswick (NB) timberland saw an uptick in the sales volume to 0.20 million cubic meters in Q1FY22, when compared to the sales of 0.19 million cubic meters in the pcp. The higher sales of NB timberland were on account of higher softwood pulpwood and softwood sawlog sales, which were slightly offset by the decline in the hardwood pulpwood sales volume in Q1FY22.
  

• Higher dividend yield: Recently the company declared a dividend of CAD 0.29 per share, to be payable on July 15, 2022, which brings the stocks dividend yield of approx. 6.78%, which is very lucrative in the given scenario when the global markets are experiencing a meltdown. The group is following very strong corporate governance policies, which is depicted in the total dividend payout ratio of 97%, which is commendable. This brings the stock to the radar of the investors seeking a regular source of income.

• Shorter cash conversion cycle: The company is efficient in converting the inventory into cash, and in Q1FY22 the group is taking 41.8 days to convert its inventory into cash, which is lower than the industry median of 64.2 days. This is a key positive, which demonstrates how efficient the company is in rotating its cash as compared to the industry peers.
  

• Sequential improvement in the margins: During Q1FY22, the company reported higher revenue numbers which were slightly offset by the marginal increase in the cost of sales, resulting in the improved profitability margins sequentially, which are presented below.

Source: Refinitiv, Analysis by Kalkine Group

Risks associated with investment

The company is vulnerable to the slowdown in housing and construction activity on account of rising interest rates, economic slowdown, etc.

Financial overview of Q1FY22 (Expressed in thousands of CAD)

Source: Company Filing 

• During Q1FY22, the company reported an increase in the total revenues to CAD 26.63 million as compared to CAD 25.89 million in Q1FY21. The sales from Maine timberlands rose to CAD 8.62 million in the reported period (Q1FY22) vs the sales of CAD 7.57 million in pcp. The higher sales from Maine timberland were slightly offset by the lower revenues from NB Timberlands, resulting in the limited increase in the total sales in Q1FY22. 

• The operating income for Q1FY22 increased to CAD 6.83 million against the operating income of CAD 6.74 million in the pcp.

• For Q1FY22, the company reported a lower net income of CAD 4.15 million vs the net income of CAD 5.82 million in Q1FY21.
  

Valuation Methodology (Illustrative): Price/ Cash-flow based

Analysis by Kalkine Group

Stock Recommendation:

The group increased revenue of CAD 26.63 million in Q1FY22, as compared to the revenue of CAD 25.89 million, also the total sales increased to 0.30 million cubic meters in the same period (Q1DFY22) against the total sales of 0.29 million cubic meters in the pcp. The growing housing demand and construction activity are a few of the key forces for the company to report higher sales, and the continuation of the trend could be a key positive for the company. Also, the free cash flows increased to CAD 5.01 million in the Q1FY22 against the free cash flows of 4.99 million in the pcp. The group recently declared a dividend of CAD 0.29 per share which brings the dividend yield of the stock close to 6.78%, which is appreciable in the given scenario. On the valuation front, the stock is measured on the Price/ Cash flow-based relative valuation multiple and the stock is currently trading at 2.2x as compared to the industry (basic materials) median of 4.0x, suggesting the stock is still undervalued. We have considered Mercer International Inc., Conifex Timber Inc., etc as the peer group for the comparison.

Therefore, based on the above rationale, and valuation, we recommend a “Hold” rating on the stock of ADN at the last closing price of CAD 17.10 on June 14, 2022. Additionally, the 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 of June 14, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

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.