Western Forest Products Inc.

Western Forest Products Inc (TSX: WEF) is a Canada-based softwood forest products company which is engaged in the activities like timber harvesting, reforestation, forest management, sawmilling logs into lumber and wood chips, and value-added lumber remanufacturing.

Key Highlights:

• Sale of Port Alberni Properties: On August 12, 2021, the company reported the sale of its Somass sawmill site and specific operations at a price consideration of CAD 5.3 million to the City of Alberni. As indicted by the management, the Somass sawmill site was witnessing supply constraints, which was hampering the company’s operations.
• Strong Growth in Cash flows: The company reported a strong cash flow growth and posted cash from operations of CAD 159 million in H1FY21, as compared to the cash utilization of CAD 18.6 million in pcp. The above was supported by a robust net income of CAD 132.1 million, as compared to a net loss of CAD 12.5 million in pcp.
• Less dependence on Commodity prices: About 78% of the lumber revenue is generated from non-commodity products, and hence, the operations is less affected by any price volatility in international lumber prices. The company posted an improved margins by selling its Specialty Products and also provides stability to its earnings, which is a key positive.
• Industry beating margin profile: Notably, gross margin and EBITDA margin stood at 38.6% and 29.1%, respectively, as compared to the industry median of 30.7% and 20.9% in Q2FY21, respectively. Net margin stood higher at 18.9% in Q2FY21, as compared to the industry median of 12.7%.

Q2FY21 Financial Highlights:

• WEF announces its quarterly result, wherein the company posted its revenue of CAD 414.4 million, jumped from CAD 256.3 million in the previous corresponding period (pcp). The growth was driven by growth from lumber income (CAD 353.1 million v/s CAD 188.8 million in pcp), partially offset by lower logs revenue (CAD 46.3 million v/s CAD 60.5 million in pcp).
• The group reported an operating income of CAD 106.6 million, climbed from CAD 14.2 million in Q2FY20.
• Net income stood at CAD 78.3 million, as compared to CAD 8.5 million in the previous corresponding period (pcp).

Q2FY21 Income Statement Highlights (Source: Company Report)

Risk: The primary driver of lumber is the construction and remodeling of housing across North America, and hence, a change in building activities would likely to dampen the demand for lumber.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The company’s operation depends on the U.S. Repair & Remodelling activities, while the outlook remains bright owing to the higher capital expenditure from Remodelling Market. Notably, the sector is expected to grow at a CAGR of 1.7% till FY24, while the company is highly poised to take advantage. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered industry (Basic Materials) median on an NTM basis. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of WEF at the last closing market price of CAD 2.09 on September 2, 2021.

One-Year Technical Price Chart (as on September 2, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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