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. Hardwoods products line includes O2Bamboo, Echo Wood, Dragon Ply and RELY-A-FORM, as well as other Specialty Products.

Key Updates:

• Reported Constant Growth: Over the years, the company reported a consistent growth in its top-line and profitability, which indicates growing demand for the company’s products along with strong client-relationships, which is encouraging. Moreover, the company has a long-standing supplier relationship management, which provides a wide product offering both proprietary and exclusive offerings. During FY16 to FY22, the company reported CAGR of 22% in sales. Notably, the company’s adjusted per share and free cash flow per share also grew 37.8% and 37.7%, respectively, during that period.

Source: Company Presentation

• Favorable Macros: The company’s products are dependent on the housing and construction activities prevailing in the North American Market. Notably, in the recent past, a historic under-build housing activity along with strong construction confidence resulted in new residential construction, while the momentum is likely to continue in the coming days. Moreover, added factors like historically low mortgage rates, low volumes of homes available for resale also augurs well for new home construction.

• Surge in Dividend payment: The company reported a higher dividend payment of USD 6.8 million in FY21, as compared to USD 5.1 million in FY20. A higher dividend distribution amidst the ongoing sluggish economic growth is impressive as most of the businesses are lowering their dividend distribution in order to retain liquidity.

• Result Update: The company would disclose its First Quarter FY22 result on May 13, 2022.

Risk Associated with the Investment:

The company’s operation is prone to several risks like lower home building due to lower consumer sentiment, rise in home loans, change in consumer preferences etc.

FY21 Income Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• HDI announced its FY21 result, wherein the company posted its top line of USD 1,616.1 million, which is higher than USD 928.4 million in FY20. The growth was supported by the positive impact from acquisition coupled with a favorable foreign exchange rate. Additionally, a strong organic sales growth due to robust market demand has resulted in higher volumes and increased market prices for the products.
• The company reported a growth in its gross profit of USD 372.9 million, which is significantly higher than USD 178.5 million in FY20, driven by higher income, partially offset by a surge in cost of goods sold.
• The period was marked by higher selling & distribution expense, along with a surge in the administration expense. Despite a surge in input costs, the company managed to be reported strong growth in profit from operations, supported by higher gross profit, as mentioned above.

• The group posted its net profit of USD 103.1 million, soared from USD 28.0 million in FY20, thanks to higher profit from operations, partially offset by higher net finance expense and a rise in income tax expense.
  

Valuation Methodology (Illustrative): EV to Sales based methodology.

Analysis by Kalkine Group

Stock Recommendation:

The company offers value-added products, a majority of which are non-commoditized in nature, which indicates margin stability despite higher raw material prices due to rising commodity prices. Due to the current change in consumer preference of migration from high density urban areas to suburban areas also increasing demand dynamics, which would likely to drive fresh housing construction.

We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Doman Building Materials Group Ltd, Titan Machinery Inc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of HDI at the last closing price of CAD 32.35 on May 02, 2022. 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 May 02, 2022). Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV

 Technical Analysis Summary

Disclaimer

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