Hardwoods Distribution Inc. (TSX: HDI) is a Canada-based company that is engaged in the wholesale distribution of hardwood lumber and related sheet goods and specialty products. The group operates a network of distribution centers across USA and Canada and the majority of the revenue originates from USA.

Key highlights

• Improved adjusted EBITDA: The company reported a staggering rise of 168.4% in its adjusted EBITDA of USD 195.22 million for FY21 as compared to the adjusted EBITDA of USD 72.72 million in FY20. The increased revenues and limited increase in its operational expenses, helped the group to witness a rise in adjusted EBITDA as a % of revenue to 12.1% in FY21 vs 7.8% in FY20.

• Higher revenues: For FY21, the company reported an increase in its total revenues by 74.1% to USD 1,616.19 million as compared to USD 928.43 million in FY20. Out of the increased sales, 35% was from the organic revenue growth of USD 327.6 million in FY21 and the other major chunk of 39.7% was from the businesses acquired. The sales from the USA grew by 75% to USD 1,441.1 million in FY21 vs USD 821.02 million in FY20.

• Increased liquidity: The company raised its cash and cash equivalents to USD 7.76 million during FY21 as compared to USD 0.45 million in FY20. The cash flows from operating activities were reported at USD 162.58 million in FY21 which is higher than the USD 62.26 million in FY20.

• Improved profitability margins: Below is the graphical representation of the improved profitability margins in FY21 as compared to FY20.

Source: Refinitiv, Analysis by Kalkine Group

Risks associated with investment

The group is majorly exposed to the economic ups and downs, whereas the rising interest rates might dent the growth in the near future, further any fresh restrictions pertaining to COVID-19 can also have a severe impact on the business. In addition to this, the company is facing other challenges as foreign exchange volatility, liquidity risk, and credit risks, to name a few.

Financial overview of FY21 (Expressed in thousands of USD)

  Source: Company Filing

• The company witnessed an increase of 74.1% in its total revenue to USD 1,616.19 million in FY21 vs USD 928.43 million in FY20. A major increase was reported in the revenues from USA by 75% to USD 1,441.11 million in the FY21 vs USD 821.03 million in FY20.

• The gross profit for FY21 increased to USD 372.91 million as compared to USD 178.54 million in FY20. The improved market conditions, suitable changes in the product mix, etc paved the way for the company to clock the improved gross profits in FY21.

• For FY21, the profit from operations improved to USD 148.33 million as compared to USD 43.65 million in FY20.

• For FY21, the company reported the Net profit of USD 103.14 million against USD 28.03 million in FY20.

Valuation Methodology (Illustrative): EV to Sales based valuation

 Stock recommendation

The company recently stated that the demand for its products will be on a strong growth trajectory for FY22 which will be perpetuated by the strong fundamentals driving the markets and the group might witness a multi-year runway for growth in the residential, repair, and remodel, and commercial end markets. The group has effectively brought down its Debt to Equity ration to 1.38x in Q4FY21 vs 2.05x in  Q3 FY21, which is a key positive. On the valuation front, the stock is measured on the EV to Sales based multiple, and currently trading at 0.5x which is lower than the industry median (Consumer cyclical) of 1.1x, implying the stock is deeply undervalued as compared to its peers. For the valuation, we have considered Doman Building Materials Group Ltd, DXP Enterprises Inc., etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing market price of CAD 34.35 on April 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 on April  08, 2022). Source: REFINITIV, Analysis by Kalkine Group

 Technical Analysis Summary

Disclaimer

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