Canfor Pulp Products Inc. (TSX: CFX) is a Canada-based company engaged in the production and sales of northern bleached softwood-wood kraft pulp, or NBSK pulp and paper. The firm organizes itself into two segments based on product: pulp and paper.

Key highlights

• Recorded higher average NBSK pulp price in FY 2021: The company reported a 45% rise in its NBSK pulp prices sold to China at USD 850 per tone in FY21 as compared to USD 588 per tone in FY20. For the North American region, the NBSK the average sales price was USD 1,478 per tone, which is up by 30% as compared to the previous year. The increase in demand for the bleached kraft paper markets was one of the key reasons driving the strong numbers and higher average sales price  

• Increase in Cash and cash equivalents: For FY21 the company came out with an exponential increase of CAD 66.5 million in cash and cash equivalents to the total of CAD 73.3 as compared to CAD 6.8 million in FY20. The strong liquidity will help the company to meet its day-to-day business operations along with any expansions in production capacity if required.

• Debt management: The group is very cautious in terms of its debt management which is easily imitated on its books. For Q4FY21, the Debt to Equity ratio of the company stood at 0.11x which is lower than the industry median of 0.24x. Further, the company’s percentage of Long term Debt to Total capital was at 9.5% for the reported period which is also lower than the industry median of 15.1%.

Source: Refinitive, Analysis by Kalkine Group

Risks associated with investment

The company is very much exposed to the volatility in the lumber prices and any sustainable unfavorable movement can dampen the company's financials deeply. A few of the other risks are supply chain disruptions, shortage of labor, credit risk, and currency volatility. 

Financial overview of FY2021 (Expressed in millions CAD)

Source: Company Filing 

• The company reported an increase in revenues to CAD 1,144.9 million in FY21 vs CAD 990.5 million in FY20. There was a marginal decrease in the total pulp shipment to 1.01 million tonnes in FY21 from the previous comparable period, but on the account of the higher average realized sales value of its products, the company was able to clock the higher revenues.

• The Manufacturing and production cost rose to  CAD 862.1 million in FY21 from CAD 804.5 million in pcp. An increase was mainly due to higher cost of wood chips, which is the key raw material for the manufacturing of paper.

• The group reported an operating loss of CAD 65.50 million in FY21  which is a bit higher than the operating loss of CAD 56.1 million in pcp. There was a one-time asset impairment charge of CAD 95 million which added to the operating loss in FY21.

• For FY21 the company reported a net loss of CAD 44.4 million as compared to the Net loss of CAD 22.4 million in pcp.
  

Valuation Methodology (Illustrative): EV/ Sales Multiples Based

Analysis by Kalkine Group 

Stock recommendation 

The company reported strong FY21 revenue numbers of CAD 1.14 billion with a growth of 15.5%  as compared to the FY21 revenues. The stronger demand coming from China, with restricted global supply is a tailwind for the company to project a healthier outlook for FY22. The group stated a minimum reduction of 25,000 tones of BCTMP production in Q1FY22 on account of restricted global logistics issues currently prevailing.   

On the valuation front, the stock is measured on the Enterprise to Sales multiple base, and is currently trading at 0.3x as compared to the industry median (Basic Material) of 1.7x, which hints the stock is highly undervalued, leaving the scope for the stock to match the industry valuations. We have considered Western Forest Products Inc., KP Tissue Inc., and Conifex Timber Inc. as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing market price of CAD 5.15 on March 10, 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 on March 10, 2022). Source: REFINITIV, Analysis by Kalkine Group 

 Technical Analysis Summary

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.