Canfor Pulp Products Inc. (TSX: CFX) produces and sells northern bleached softwood kraft pulp, or NBSK pulp and paper. The company also generates and sells electricity from biomass out of its pulp plants in Western Canada.

Key Highlights

• Improved demand for the Bleached kraft paper segment: As per the management, the demand for the Bleached kraft paper in North America is likely to stay strong in the Q4FY21, due both tight supply and increased demand scenario. Additionally, offshore bleached kraft paper markets are also anticipated to be strong over the same period, which is a key positive. These are expected to create improve demand for the pulp across the geographies, which would further support the company’s sales volume for the coming quarters.

• Surge in cash flows: The company reported a higher cash flow of CAD 114.1 million in 9MFY21, as compared to CAD 85 million in pcp, supported by a net income of CAD 56.7 million in 9MFY21, versus a net loss of CAD 12.2 million in pcp. The above indicates better operational efficiency and improved liquidity.
  

• Healthy Balance-sheet: At the end of Q3FY21, the company reported healthy D/E of 0.09x, as compared to the industry median of 0.25x. Moreover, long-term debt as a % 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.
  

• Trading at discounted valuations: The company’s shares are available at an NTM EV/EBITDA multiple of 3.5x compared to the industry (Basic Materials) median of 4.3x. while on NTM EV/Sales multiple the stock is trading at 0.3x compared to 1.5x. This implies that the shares are trading at deep discount against the industry. The stock is undervalued on multiple valuation parameters. The table below reflects the picture.

Source: REFINITIV, Analysis by Kalkine Group 

Risk associated with the investment

The company might face challenges due to above-average global pulp inventory levels and a heavily congested global supply chain network coupled with softening demand from Asia especially from China.  

Financial Overview of Q3FY21

Source: Company Filing 

• CFX announced its quarterly result, wherein the company posted its sales of CAD 298.9 million, significantly higher than CAD 226.4 million in pcp. The growth was supported by strong growth from the Asia and Europe regions.
• The company reported a higher operating expense at CAD 283.1 million, compared to CAD 254 million in pcp, due to increase in manufacturing & product costs.
• Operating income stood at CAD 15.8 million, as compared to an operating loss of CAD 27.6 million in pcp.
• The company turned profitable and posted a net income of CAD 12.1 million, as compared to 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’s paper shipments in the third quarter of 2021 were 34,000 tonnes, up 4,000 tonnes from the previous quarter, primarily due to higher paper production across most of the geographies. Continuation of the above is likely to support the company’s overall performance. Furthermore, as per the management, the demand for the Bleached kraft paper in North America is likely to stay strong in the Q4FY21, due both tight supply and increased demand scenario, which is a significant plus for the group.

Moreover, the company showcased its mettle by reporting positive cash flows in 9M FY21. Additionally, the stock of CFX is trading on the deeply discounted valuation on the multiple parameters, which attracts the attention of the investors. Hence considering the aforesaid facts and valuation, we recommend a ‘Speculative Buy’ rating on the stock of CFX at the last traded price of CAD 5.99 on January 31, 2022.

One-Year Price Chart (as on January 31, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

Disclaimer

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