CanWel Building Materials Group Ltd

CanWel Building Materials Group Ltd (TSX: CWX) is a wholesale distributor of building materials and home renovation products. The company primarily serves new home construction, home renovation, and industrial markets and provides its building products to dealer/lumberyard and home improvement centers.

Key highlights 

• Healthy preliminary numbers for Q1 2021:  Given the ongoing strength in both the operating environment and pricing for its underlying products, the Company’s financial performance in Q1 2021 is significantly stronger than the comparable quarterly period in 2020. The Company expects a growth of about 59% in revenue to CAD 520 million, versus CAD 327 million; a gain of around 253% in EBITDA to CAD 60 million, versus CAD 17 million and gross margin percentage of approximately 17%, versus 13% in the previous corresponding period respectively. 

• Healthy housing starts: The seasonally adjusted annualized rate for overall Canadian housing starts grew by 4.4% to 217,802 in 2020, against 208,685 in 2019, and the seasonally adjusted annualized rate for single-detached units increased by 22.1% to 69,443 in Q4 2020, against 56,869 in Q4 2019. The same trend was witnessed in the US housing starts. Higher housing starts is a positive aspect for the company. 

• Reduced total loans: Year over year, the group reduced gross loans and borrowings by CAD 87.5 million to CAD 281.3 million as of December 31, 2020, thanks to continued disciplined balance sheet restructuring and working capital management techniques. 

• Dividend distribution along with a special dividend: Given the strength of a business over the quarters, improved cost structure, strong balance sheet and solid cash flow, the company paid a dividend of CAD 0.12 per share on April 15, 2021. It was the group’s 44th consecutive quarter, delivering a dividend distribution. It also paid a special dividend of CAD 0.04 per share on the same date. 

Financial overview of FY2020

Source: Company

• In FY2020, the company posted sales of CAD 1,613 million, against CAD 1,334 million in 2019, representing an increase of CAD 279.6 million or 21.0%, due to an improvement in activities and robust housing starts resulted in increased demand from consumers.
• Gross profit stood at CAD 256.1 million in the reported period, against CAD 191.9 million in the previous corresponding period.
• Operating earnings reported by the company were of CAD 98.3 million, against CAD 44.3 million in pcp, partially offset by higher cumulative operating expenses.
• The company reported a higher net income of CAD 59.5 million V/s CAD 17.2 million in pcp. The rise in net income was supported by higher operating earnings and lower finance cost. 

Risks associated with investment

The Company is exposed to risks related to wood product prices, liquidity risk, currency risk, interest rates risk and credit risk. The Company’s overall business could be impacted due to changes in government policies and regulations. The Company may fail to integrate the acquired assets, which may lead to integration risk. 

Valuation Methodology (Illustrative): EV to Sales 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

For the year ended December 31, 2020, consolidated revenues increased by 21.0% to CAD 1,613 million. The increase in sales was attributable to an improvement in both sales volumes and pricing. It also reduced its total loans and borrowings by CAD 87.5 million to CAD 281.3 million, which is appreciable. Furthermore, the volume and pricing momentum experienced by the company during the end of fiscal 2020 is expected to be continued into the first quarter, resulting in significantly higher guidance by the management on critical numbers. We have valued the stock using EV to Sales based valuation metrics and arrived at a target price offering a low single digit upside potential (in % terms). Therefore, we recommend a “Watch” rating on the stock at the closing price of CAD 10.715 on April 21, 2021 and suggest investors to wait for better entry levels. We have considered Cascades Inc, Mercer International Inc, Hardwoods Distribution Inc. etc. as the peer group for the comparison.

1-Year Price Chart (as on April 21, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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