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: According to management, demand for hardwood sawlogs is expected to remain high for the remainder of FY21, owing to better demand dynamics from the industrial market. The market for softwood lumber is likely to stay stable, owing to the favorable prognosis for home construction and improvements in the United States. Furthermore, demand for biomass tied to the company's New Brunswick operation is expected to remain constant in FY21 and FY22, owing to strong regional demand.

• Improved cash flows: The company reported a higher cash from operation of CAD 14.6 million in 9MFY21, as compared to CAD 13.3 million in pcp, supported by higher profitability. A higher cash from operations indicates improved liquidity position. Notably, free cash flow, during the respected period stood at CAD 11.4 million, significantly higher than CAD 9.5 million in pcp.

• 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 Q3 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. In Q3 2021, its Cash Cycle stood at 32.8 days against 48.3 days in Q2 2021. Also compared to industry median its very low, which is at 68.0 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 paid a quarterly dividend of CAD 0.29 per share. Moreover, the stock offered a dividend yield of 6.105%, which seems lucrative, considering the current interest rate environment.

• Corporate Update: The company will release its 2021 fourth quarter results after market close on February 9, 2022.
  

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 Q3 2021

Source: Company Filing

• In Q3 2021, the company recorded sales of CAD 22.6 million, as compared to CAD 23.2 million in pcp. The marginal slide was primarily due lower revenue from the Hardwood segment.
• The quarter was marked by lower cost of sales, coupled with a slide in the Selling, administration and other expense, as a result its operating earnings improved slightly to CAD 4.7 million against CAD 4.4 million in pcp.
• In the reported period the company’s net income stood at CAD 0.087 million, as compared to CAD 5.2 million in pcp, primarily due to an unrealized loss of CAD 3.0 million, along with higher income tax expenses.
  

Valuation Methodology (Illustrative): Price to Earnings

Stock recommendation

Steady prices and strong demand of the company’s sawlogs have enabled them to generate solid operating and financial performance in Q3 2021. Additionally, the strong end use markets for hardwood lumber and low hardwood sawlog inventories regionally are expected to support continued strong demand and pricing for the company’s hardwood sawlogs. The management of Acadian timber Corp. also expects continued steady demand for its key products for the remainder of the year, which is a key positive.

Moreover, the management also expects stable demand for its primary goods for the rest of the year, which is a major plus. In addition, the company has an industry-leading operating margin matrix and a short cash cycle day. Finally, the stock has a high yield of 6.108%, which is excellent and can be a key feature for long-term investors. Therefore, considering the above rationales and valuation, we recommend a “Hold” rating on the stock at the last closing price of CAD 19.00 on January 28, 2022.

One-Year Technical Price Chart (as on January 28, 2022). Source: Kalkine, Analysis by Kalkine Group

Note: The reference data has been taken from REFINITIV.

Disclaimer

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