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 and generates maximum revenue from the NB Timberlands segment. Its product includes softwood and hardwood sawlogs, pulpwood and biomass by-products.

Key highlights 

• Optimistic outlook: In the short to medium term, demand for softwood and hardwood lumber in North America is likely to be supported by repair and remodeling activities as well as new house building. In 2022, the consensus projection is for 1.57 million house starts in the United States, down from 1.58 million in 2021. Despite rising mortgage rates, a huge U.S. population approaching its home-buying years and a low inventory of homes for sale will be important drivers of this expansion. The company also anticipates good demand and pricing for its hardwood sawlog products, as well as new client partnerships in the appearance and industrial hardwood timber sectors.

• Clocking higher free cash flows: Favorable sawlog pricing, robust softwood sawlog sales in Maine, and increased timber services activities in New Brunswick all contributed to the company's higher adjusted EBITDA, resulting in significant free cash flows of CAD 16.9 million in FY 2021, compared to CAD 15.2 million in FY2020.

• Industry beating margins: The Company maintained its pace and witnessed spirited performance across its operating margin matrix. In addition, the management’s solid determination helped them leap the industry median margins on many fronts in Q4 2021, which exhibits the competitive advantage of the company within the industry.

                  Source: REFINITIV, Analysis by Kalkine Group

• Shorter cash cycle days: The company’s Cash Cycle (Days) has fallen compared to the previous sequential quarter, implying the company is taking fewer days to convert its inventory to cash, which is crucial positive aspect. In Q4 2021, its Cash Cycle stood at 30.4 days against 32.8 days in Q3 2021. Also compared to industry median its very low, which is at 61.0 days.

• An income play: Despite the difficult circumstances, the company continues to pay dividends, indicating its financial strength and implying that it is an income investor's friend. Recently, the company declared a quarterly dividend of CAD 0.29 per share, payable on April 15, 2022. Moreover, the stock offered a dividend yield of 6.08%, which seems lucrative, considering the current interest rate environment.

Risks associated with investment

Sluggish demand for wood products might result in higher inventory levels, which might restrict the company's capacity utilization. Furthermore, a continuation of the ongoing weak hardwood pulp demand might dampen the sales of the company.

Financial overview of FY2021

Source: Company Filing

• In FY 2021, the company recorded sales of CAD 95.7 million compared to CAD 91.0 million in pcp. An increase in the revenue was primarily due to higher weighted average selling price, excluding biomass, which increased 4% with a higher value product mix and strong sawlog prices.

• A year was marked by higher operating expenses which stood at CAD73.9 million against CAD 70.2 million in pcp, primarily due to higher harvesting costs and timber services activity.

• In the reported period the company’s net income stood at CAD 18.6 million compared to CAD 22.0 million in pcp. The slide in the net income was mainly due to lower Fair value adjustments, partially supported by lower interest expense and lower income tax expense.
  

Valuation Methodology (Illustrative): Price to Cash Flow

Analysis by Kalkine Group

Stock recommendation

The market for the company's products is still robust, with a number of new clients starting to receive deliveries, and the firm is still looking for new business growth prospects and enhancements across the board, which is a big plus. In the short to medium term, demand from repair and remodeling activities, as well as new house building, is likely to boost North American softwood and hardwood timber consumption. In addition, the firm has an operational margin matrix that leads the industry and a quick cash cycle day.

Finally, the stock has a high yield of 6.08%, which is excellent and can be a key feature for long-term investors. Therefore, considering the above rationales and valuation, we recommend a “Speculative Buy” rating on the stock at the last closing price of CAD 19.05 on March 31, 2022. Moreover, 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 Price Chart (as on March 31, 2022). Source: REFINITIV, Analysis by Kalkine Group

 Technical Analysis Summary

Disclaimer

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