Canfor Pulp Products Inc (TSX: CFX) is mainly into processing and selling of bleached softwood kraft pulp, or NBSK pulp and paper. Additionally, from the biomass generated from its pulp plants, the company sells and produces electricity. The firm has two main business segments, i.e., pulp and paper, where pulp segment generates majority of revenue.

Key highlights 

• Positive outlook for Paper demand: The demand for Bleached kraft paper is expected to remain robust during the fourth quarter of 2021 aided by tight supply and rising demand scenario. Furthermore, offshore demand for bleached kraft paper markets will also remain strong considering the demand scenario.
  

• Improved Operating Cash Flows: During Q3 2021, the company generated an operating cash flow of CAD 34.6 million, compared to CAD 16.4 million cash used in the third quarter of 2020, supported by a positive net income of CAD 12.1 million versus a net loss of CAD 18.1 million in the pcp. The above indicates better operational efficiency and improved liquidity.
  

• Increased Revenue and a healthy Balance Sheet: In Q3 2021, the Company reported higher revenue at CAD 298.9 million compared to CAD 226.4 million in the previous corresponding period. Moreover, at the end of Q3FY21, the company reported a healthy D/E of 0.09x, as compared to the industry median of 0.25x. Moreover, long-term debt as a percentage to total capital stood at only 0.3%, as compared to the industry median of 15.9%. Hence, the above indicates prudent capital management along with lower balance sheet risk.
  

• Corporate update: The company will be sharing its Q4 2021, financial and operating results on Wednesday, March 2, 2022.
  

Risk associated with the investment 

Most of the company’s revenue is derived from the lumber segment, and a correction in the lumber prices would lead to lower realization, which may hinder the company’s cash flows and margins. 

Key Financial Highlights Q3 2021 (in million CAD) 

Source: Company Report

• In Q3 2021, the company posted revenue of CAD 298.9 million, compared to CAD 226.4 million in the previous corresponding period.
• Operating expenses for the reported period increased to CAD 283.1 million compared to CAD 254.0 million in pcp, mainly due to higher manufacturing and product costs.
• On the back of higher revenue, the company’s operating income stood at CAD 15.8 million against a loss of CAD 27.6 million in pcp.
• The company posted a net income of CAD 12.1 million against a net loss of CAD 18.1 million in pcp.
  

Valuation Methodology (Illustrative): EV to EBITDA Based

Analysis by Kalkine Group 

Stock recommendation 

The company reported a solid financial result in its Q3 2021, supported by increased paper shipments, which were up 7,000 tonnes from the previous year. Moreover, improved cash flow and rising demand for the Bleached kraft paper in North America due to tight supply and increased demand would benefit the company’s overall performance. Additionally, the company is focused on increasing its productivity going forward, which will be a key positive. Hence, considering the aforesaid facts and valuation, we recommend a ‘HOLD’ rating on the stock of CFX at the last traded price of CAD 6.59 on February 16, 2022.

One-Year Technical 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.

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