West Fraser Timber Co Ltd.

West Fraser Timber Co Ltd. (TSX: WFG) is a softwood lumber company that also produces wood panels and pulp products. The company is active throughout North America, with lumber mills in British Columbia, Alberta, and the Southeastern United States.

Why Should Investors Book Profit?

• Falling Lumber Prices: The cost to build or improve a home since the start of the pandemic has skyrocketed because of the rising prices of lumber, and lumber prices are showing signs of letting up. Futures contracts fell to USD 790 per thousand board feet of lumber on November 25, a 53% drop from the record-breaking high of USD 1,670.50 on May 7. We believe this price challenge contributes to substantial reductions in profit margins and leads to cash flow difficulties.
  

• Weak Performance on Sequential Basis: The demand for a number of the company's products softened in the third quarter, along with a drop in the lumber prices, was the key ingredient. Its financial performance deteriorated on a sequential basis.

Source: Company

• Long Cash Cycle Days: The company's cash cycle is increasing compared to the previous sequential quarter, which means it takes more days to convert its inventory to cash. In Q3FY21, its cash cycle stood at 97.6 days against 95.3 days in Q2FY21. Also, compared to the industry median, it's very high, at 64.5 days only.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales

*1USD=1.27CAD 

Stock Recommendation

We believe the falling lumber prices are becoming a challenge to the company, contributing to substantial drops in profit margins and cash flow difficulties. Furthermore, the demand for several WFG's products softened in the third quarter, due to which its financial performance deteriorated on a sequential basis. Additionally, its cash cycle has expanded compared to the previous sequential quarter, implying that it takes more days to convert its inventory to cash. Hence, based on the above rationales and valuation, we recommend a "Sell" rating on the stock at the closing price of CAD 106.24 on November 26, 2021.

One-Year Technical Price Chart (as on November 26, 2021). Source: REFINITIV, Analysis by Kalkine Group 

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

Dream Office REIT

Dream Office REIT (TSX: D.UN) is a Canada-based open-ended real estate investment trust, which focuses on owning, leasing and managing office properties in urban centers across Canada, focusing on downtown Toronto. The trust holds approximately 30 properties with a total gross leasable area (GLA) of 5.5 million square feet.

Why Should Investors Book Profit?

• Increasing Uncertainties: The resurgence of the Delta variant and another new variant have raised many questions. It might influence the company's operations and cash flows as the government may tighten mandatory lockdowns to combat the spread.

• Drop in Occupancy Ratio: In the reported period (Q3FY21), the company's occupancy rate dropped to 82.7% compared to 87.8% in the previous corresponding period.

• Sequential Decline in Cash Rent Collection: On a quarterly basis, the group is witnessing a consistent decline in its cash rent collection, which is not a healthy sign.

Source: Company

• Lower Margin Profile v/s Industry: In Q3FY21, the company failed on maintaining its pace and witnessed lower performance under the operating margin matrix, consisting of gross margin (55.0% v/s industry median of 68.8%) and EBITDA margin (51.0% v/s industry median of 59.5%), which exhibits pressure on the company.

• Weak Liquidity Profile: In Q3FY21, the company's current ratio stood at 0.05x against the industry median of 0.87x. The lower ratio against the industry indicates that D.UN's short-term obligations are growing faster than its resources to cover them, which is not a good sign.

Valuation Methodology (Illustrative): EV to Sales based valuation

Stock Recommendation

In Q3FY21, the trust reported a slightly dented net rental income of CAD 27.3 million, compared to CAD 27.9 million in the previous corresponding period, primarily due to lower weighted average occupancy and lowered transient parking revenues due to parking lot closures from city lockdown restrictions across its portfolio. The group also reported a drop in its occupancy ratio and a sequential decline in its cash rent collection, which is worrisome. In addition, the return of the COVID-19 Delta variant cases and another new variant has sparked many worries, and it may have an impact on the company's operations and cash flows. Furthermore, D.UN is heavily leveraged, implying higher balance sheet risks. Hence, based on the above rationales and valuation, we recommend a "Sell" rating on the stock at the closing price of CAD 23.04 on November 26, 2021.

One-Year Technical Price Chart (as on November 26, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Altius Minerals Corporation

Altius Minerals Corporation (TSX: ALS) operates as a diversified mining royalty and streaming company in Canada and Brazil. The company owns royalty and streaming interests in 14 operating mines covering copper, zinc, nickel, cobalt, iron ore, precious metals, potash, and thermal and metallurgical coal.

Why Should Investor's Book Profit?

• Trading Below Crucial Support Levels: ALS shares decisively breached its crucial long-term support level of 200-day SMA, a bearish indicator on the daily price chart. Also, the stock is trading well below the crucial short-term support level of 50-day SMA. It seems that the stock has entered a long-term bearish zone.

Technical Price Chart (as on November 26, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Bearish Momentum Indicators: The leading momentum indicator, the Moving Average Convergence Divergence (MACD), is falling and the difference between the 12-day EMA and 26-day EMA is negative a bearish indicator. Also, the MACD oscillator traded below the 9-day SMA signal line, another bearish indicator. Further, the 14-day RSI is also falling and hovering in a neutral zone.

Technical Price Chart (as on November 26, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Weakness in Underlying Commodity Prices: The company's underlying commodity prices are falling amid rising demand concern on the back of a resurgence in the COVID-19 cases in Europe. The recent identification of a new strain of COVID-19 is also throwing a lot of uncertainties over the commodity prices and demand offtake for the miners of these commodities.
  

Stock Recommendation

Despite being fundamentally decent, the company's future looks bleak due to the uncertainties in global commodity demand resulting from the resurgence of the COVID-19 cases. Also, miners have started witnessing supply chain bottlenecks. Moreover, from the technical standpoint, the company has entered into a long-term bearish zone, up for a potential downside from the current trading level. Hence, we recommend a "Sell" rating at the closing price of CAD 15.42 (as on November 26, 2021).

Technical Price Chart (as on November 26, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.