Canfor Corporation

Canfor Corporation (TSX: CFP) is a leading Canada based integrated forest products company, which produces softwood lumber. Canfor has a majority stake in Canfor Pulp Products Inc., producer of Softwood Kraft Pulp and a premium kraft paper. The Group operates through two major segments, namely, lumber and pulp and paper, and the majority of the revenue is derived from the Lumber segment. The Company operates across different geographies like Canada, Asia, United States and Europe. During the first quarter of FY20, the Company sold ~50% of the product to the United States, while ~28% and ~11% to Asia and Canada, respectively.

Earlier, the Company reported that its subsidiary Vida Group entered into a definitive agreement to acquire three sawmills located in Sweden from Bergs Timber at a price consideration of CAD 43 million plus working capital. The transaction is expected to complete in the third quarter of FY20.

Q1FY20 Financial Highlights: CFP announced its quarterly results and reported revenue of CAD 1,170.7 million, improved from CAD 1,148.7 million in pcp. The improvement was driven by higher lumber sales aided by higher European SPF shipments. Total costs and expenses increased to CAD 1,259.5 million, against CAD 1,213 million in pcp due to higher manufacturing & product costs, higher countervailing and anti-dumping duty expense, followed by a significantly higher amortization cost, partly offset by a decline in freight and other distribution costs and a lower selling and administration costs. The Group’s operating loss came in at CAD 88.8 million against a loss of CAD 64.3 million in pcp. Net loss during the first quarter of FY20 declined to CAD 65.2 million from CAD 79 million in the previous corresponding quarter. The improvement was supported by higher other income along with a gain on derivative financial instruments, while higher finance expense and higher foreign exchange loss remained a drag. The Company ended the quarter with cash and cash equivalent of CAD 116.5 million and total assets of CAD 4,691 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: The company’s performance is directly correlated to the lumber price and demand, which further depends upon the building activity and repair and renovation work across the major regions. A slowdown in construction activities would affect the company’s financial performance.

Valuation Methodology: EV to Sales based Relative Valuation (illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months 

Stock Recommendation: Despite a depressing bottom-line, the CFP stock has delivered solid return in the recent past and reported a ~106% and ~53% in the last three months and one year, respectively, outperforming the index by ~82% and ~56%, respectively. Global lumber market demand declined sharply in the wake of closures of non-essential businesses and lockdowns implemented in many parts of North America and Europe. The management believes that US home construction activity would remain at depressed levels with demand volatility varying on a regional basis. Further, the stock soared ~41% in the last one month, and we believe that most of the positives have been priced in. We have valued the stock using the EV to sales based relative valuation approach and arrived at a target price, which suggests a double-digit correction (in % terms). For the said purpose, we have considered the industry median (Paper & Forest Products). Hence, considering the aforesaid facts, we recommend a 'Sell' rating on the stock at the closing market price of CAD 15.65 as on July 17, 2020.

CFP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Hardwoods Distribution Inc

Hardwoods Distribution Inc (TSX: HDI) is a construction & materials company based out of Canada. It is engaged in the business of hardwood lumber wholesale distribution and related speciality products and sheet good. The Group’s operations are divided into two Geographic segments, i.e. Canada and the United States. The Company supplies its products to multiple industries including speciality wood products, furniture, millwork, moulding and cabinet. The Company has a wide network of 66 distributions and operates through three leading brands, namely Hardwoods Specialty Products; the Frank Paxton Lumber Company; and Rugby Architectural Building Products.

Q1FY20 Financial Highlights: HDI impresses with its quarterly results, wherein the Company reported sales of CAD 325.1 million as compared to CAD 287.1 million in the previous corresponding quarter. The improvement was driven by the positive impact of business acquisition coupled with higher organic sales and a favorable foreign exchange translation. Gross profit surged to CAD 62.612 million from CAD 51.032 million in Q1FY20, thanks to the improved revenue. Operating expenses stood higher at CAD 47.598 million compared to CAD 41.166 million in the previous corresponding period (pcp). Adjusted EBITDA rose to CAD 22.8 million, reflecting an increase of 31.7% on y-o-y basis. The Company reported net profit for the period at CAD 9.395 million as compared to CAD 5.980 million in pcp.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: A decline or slowdown in construction activities is likely to hamper the group’s performance.

Valuation Methodology: P/E based Relative Valuation (illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The Stock of HDI appreciated ~56% and ~36% in the last three months and one year, respectively, despite demand destruction across the major economies. The group witnessed a significant slowdown in sales during April, however, for the month of May, the Company witnessed a ~16% q-o-q surge in the average daily organic sales aided by higher construction activities across several regions, which is a key positive. In the recent past, the Company took prompt measures and reduced its input costs, lowered variable compensation and slashed non-essential operating expenditures, in order to preserve liquidity. Though the group reported an uptick in the sales in May, we expect overall construction scenario to remain tepid in the near term. Further, given the recent run in the stock price, we believe, most of the positives have been priced in, and the stock seems overvalued. We have valued the stock using the P/E based relative valuation approach and arrived at a target price, which suggests double-digit correction (in % terms). For the said purpose, we have considered the industry median (Basic Materials). Hence, we recommend a 'Sell' rating on the stock at the closing market price of CAD 17.71 as on July 17, 2020.

HDI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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