Operational Efficiency to Drive Growth: Stella-Jones Inc. is a Canada-based company, which is also a leading producer and marketer of pressure-treated wood products. The business supplies North America’s railroad operators with timbers and railway ties, and the continent’s electrical utilities and telecommunication businesses with utility poles. During FY19, the total group sales consist of 35.9% from utility poles, 31.3% from railway ties, 21.7% from residential lumber, 5.9% from industrial products, and 5.2% from logs and lumber.

Key highlights:

• Stella-Jones is expected to achieve several goals through customer satisfaction, core products developments, key markets, innovative work practices and the optimal use of its resources which improves the group’s position and competitive advantage in the wood treating industry. 

• During FY19, the company reported a higher EBITDA margin and operating margin of 14.4% and 11.2%, improved from 11.5% and 9.7% reported in FY18, respectively. The increase in the margin indicates an improve operational efficiency. 

• In April 2019, the company acquired all the assets of Shelburne Wood Protection Ltd. (SWP) at a total price consideration of CAD 9.2 million. The SWP plant is specialized in the treatment of residential lumber, which is likely to add value and improved business prospects of the company.

Outlook: Since the key offering of the company (utility ties and railway ties) are vital to the utility infrastructure and transportation in North America, it enable the group to enjoy stable demand. Increased penetration in the key offerings segment is expected to drive the growth in the near to medium term which is expected to result in higher revenue and margin expansion. 

FY19 Operational Highlights for the Period Ended 31^st December 2019

 (Source: FY19 Reports, Company Website)

SJ came up with its full-year results, wherein the company reported sales of CAD 2,169 million, up by CAD 45.1 million from CAD 2,123.9 million in FY18. The period was marked by higher pricing for railway ties and utility poles, and the surge in volumes for industrial products, which was offset by lower logs and lumber and residential lumber sales. Gross profit stood at CAD 358.5 million, an increase from CAD 328 million in the previous financial year. Net income came higher at CAD163.1 million, witnessed a surge from CAD137.6 million in FY18. Utility pole segment reported a 7.5% y-o-y growth in revenue to CAD 779.2 million while Railway ties segment posted revenue of CAD 678.2 million, up 2.4% on a y-o-y basis. In residential lumber segment, the revenue of stood at CAD 471.6, posted a decline of 0.6% on a y-o-y basis.

Stock Recommendation: The stock of SJ closed at CAD 28.99 with a market capitalization of ~CAD 1.96 billion. The stock made a 52-week low and high of CAD 24.00 and CAD 48.28, respectively. The group’s business is highly concentrated as 45.1% of 2019 sales was derived from top 10 customers while the largest customer contributed for ~16% of the total sales. In our opinion, the concentration of the sales may turn out to be a negative factor for the business given the current situation where most of the business and economies are facing a significant downturn on account of COVID-19 outbreak. Hence, we have a ‘watch’ stance’ on the stock at the closing price of CAD 28.99, up 8.78% as on 19^th March 2020 closing.

 SJ Daily Technical Chart (Source: Thomson Reuters)

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