Hardwoods Distribution Inc. (TSX: HDI) is a Canadian company that operates a network of distribution centers in Canada and the United States, engaged in the wholesale distribution of hardwood lumber and related sheet goods and specialty products.

Key Highlights:

• Increased revenues: During Q1FY22, the company reported an increase in the total sales to USD 644.88 million as compared to the total sales of USD 291.15 million in Q1FY21. Out of the total incremental revenue of USD 353.7 million, the organic revenue account for USD 114.7 million, and the remaining was derived from the recent acquisitions. The sales from the USA region increased to USD 591.22 million in the reported period (Q1FY22) vs the sales of USD 252.29 million in the pcp.

Source: Company Filing

• Improved outlook and favorable macros: The management is optimistic for FY22, stating the demand for the products to remain at elevated levels. The group is following the growth strategy by carefully pursuing strategic acquisitions in the core markets. The leading indicators of the US residential construction market remain positive which will be a key factor in driving the demand for the company's products. Also, the repair and remodel market is taking support from the rising home equity, which is at the advancing stage of the current US housing stock, as individuals are now allocating their money and time to their homes. All this construes a strong macro tailwind for the company to swiftly grow in the upcoming quarters.

• Improved profitability margins: During Q1FY22, the company reported strong revenue numbers with the increase in the prices of its products, though the rise in the expenses slightly offset the positive impact, still the group across the various profitability margins as compared to the pcp, which are depicted below.

Source: Refinitiv, Analysis by Kalkine Group

Risks associated with investment

The company is vulnerable to the slowdown in economic activity, and rising interest rates, which could slow down the housing demand, and other construction activities, thereby negatively impacting the company's revenues.   

Financial overview of Q1FY22 (Expressed in thousands of USD)

Source: Company Filing

• During Q1FY22, the company reported an increase in its total revenues to USD 644.88 million as compared to USD 291.15 million in Q1FY21. The organic revenue rose to 39.% and the sales from the recent acquisitions grew to 84.3%, in the given period, which helped the company to cock the higher revenue in 

• The gross profit of the company also increased to USD 147.78 million in the reported period (Q1FY22) as compared to the gross profit of USD 57.89 million in the pcp.

• For Q1FY22, the company witnessed a higher net profit of USD 43.48 million as compared to the net profit of USD 12.99 million in Q1FY21.
  

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group 

Stock Recommendation:

The group reported an increase in the adjusted EBITDA to USD 79.80 million in the Q1FY22 as compared to the adjusted EBITDA of USD 25.75 million in the pcp, and the total net profit rose to USD 43.48 million in the reported period (Q1FY22) against USD 12.99 million in Q1FY21. Recently the company declared a dividend of CAD 0.12 per common share, to be payable on July 29, 29022. The latest acquisition of Mid-Am Building Supply in Feb 2022, is expected to further boost the company’s access to the US Midwest markets, which is a key positive. On the valuation front, the stock is measured on the EV/ Sales based relative valuation multiple and the stock is currently trading at 0.5x as compared to the industry (consumer cyclicals) mean of 1.8x, suggesting the stock is still undervalued. We have considered NOW Inc., Doman Building Materials Group Ltd., etc as the peer group for the comparison.

Therefore, based on the above rationale, and valuation, we recommend a “Buy” rating on the stock of HDI at the last closing price of CAD 32.68 on June 08, 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 of June 08, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

  Technical Analysis Summary

Disclaimer

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