Interfor Corporation

Interfor Corporation (TSX: IFP) is a producer and distributor of lumber, timber, and other wood products. The operations are conducted through sawmills, which help to process timber into lumber, logs, wood chips, and other wood products, which are used for construction activities. The Group also harvests timber in Government-owned forest land and pays stumpage fees based on the number of trees it harvests to the Government. The company's major customers are from the construction and renovation industry.

Q1FY20 Income Statement Highlights: IFP announced its quarterly results, wherein the company reported revenue of CAD 479.646 million, up 6.3% on y-o-y basis. The increase was aided by higher demand from logs, residual products and other products. Operating earnings stood at CAD 14.574 million, as compared to a loss of CAD 16.81 million in the previous corresponding period (pcp), thanks to the improved revenues, lower selling and administration expense and recovery on long term incentive compensation, while higher production cost remained a drag. Net earnings stood at CAD 6.309 million, against a net loss of CAD 15.302 million in Q1FY20, primarily attributable to improved operating earnings and lower finance cost and other expense, offset by a foreign exchange loss.

Q1FY20 Income Statement Highlights (Source: Company Reports) 

Valuation Methodology: Price to Earnings based Relative Valuation (illustrative)

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

Risks: The industry was impacted by lower construction activities in the recent past, and most of the manufacturing players are operating at a significantly lower capacity. Furthermore, due to weaker lumber prices, the company might see a dip in the performance going forward.

Stock Recommendation: The Stock of IFP gained ~125% in the last three months, outperforming the index by ~100%. The company turned into profitability and has sound financial metrics and hence witnessed a sharp pullback rally in the recent past. The company slashed its capital expenditure for FY20 to preserve the liquidity. As the containment measures are in place across several geographies, the group might witness a soft demand in the near to medium term, which would result in lower sales volume and might act as a barrier to the cash flows. Further, the company announced a production curtailment due to sectoral weakness, which would take a hit at the volume. The Stock gained ~42% in the last one month and currently trading near the upper band of its 52-weeks trading range of CAD 4.75 to CAD 16.36. Considering the aforesaid facts, we expect the Stock is due for a correction. We have valued the Stock using the P/E 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 peers like Norbord Inc, West Fraser Timber Co Ltd, and Acadian Timber Corp etc. Hence, considering the aforesaid facts, we recommend a 'Sell' rating on the Stock at the closing market price of CAD 14.76 as on July 20, 2020.

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

Cargojet Inc.

Cargojet Inc. (TSX: CJT) is a Canada-based company which operates in overnight air cargo services across 14 cities across Canada. CJT offers services like overnight network, international air cargo services, dedicated aircraft charter and dedicated aircraft, crew, maintenance and insurance (AMCI) contracts. Within its overnight network, it also provides domestic air cargo services across several airlines. As per the international routes are concerned, the Cargojet provides services across Newark, New Jersey, United States of America (USA) and Hamilton, Bermuda and provides a five-day per week air cargo service.

Key Highlights:

• Recently, the Company confirmed that it had amended its syndicated committed revolving credit facility and increased the limit of revolving credit facility from CAD 510 to CAD 600 million, with a maturity date of July 16, 2025.
• The Company announced the closure of its previously announced senior unsecured hybrid debentures offerings amounting to CAD 100 million, with an interest of 5.25% per annum.

Q1FY20 Financial Highlights: CJT announced its quarterly results, wherein the Company reported revenue of CAD 123 million, reflecting an increase of 11.4% on y-o-y basis. The increase was driven by a combination of higher domestic network revenues, improved Aircraft, Crew, Maintenance and Insurance (ACMI) revenues and increase in fuel surcharges and other cost pass-through revenues. Gross margin improved to CAD 32.2 million, depicting a robust growth of 51.9% over Q1FY20, thanks to improved revenue and stable direct expenses. Adjusted EBITDA stood higher at CAD 40.2 million, as compared to CAD 32.3 million in the previous corresponding period (pcp), tanks to increase in domestic network volumes. However, the quarter was marked by higher operating costs and the group reported an increase in selling, general & administrative expenses and net finance costs & other gains and losses. The Company reported a net loss of CAD 1.8 million during the quarter.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Company reported a significantly higher finance expense during Q1FY20. Further, increasing its credit facilities and issuance of new debt instruments would increase the finance costs and build pressure on margin.

Stock Recommendation: The stock of CJT made a dream-run in the recent past and gained ~43% and ~76% in the last six months and one year, respectively. The group offers logistics services and provides transportation of 'essential commodities' within domestic and international geographies., hence the offerings are immune to the economic cycle. However, the group's long term debt to total capital ratio stood at 64.5%, which significantly higher than the industry median of 22.5%. Further, in the recent past, the Company has increased its debt components, which would lead to an erosion of profitability in the coming quarters. Furthermore, rising fuel prices due to a rally in the crude oil prices would act as a drag for the Company's operations. We, believe, most of the positives have been priced in at the current trading levels, and the stock was trading near the upper-band of its 52-weeks price range of CAD 67.88 and CAD 169.67. On the valuation front, the stock is trading at a higher premium compared to industry median (freight and logistic services). For example, the stock is trading at a forward EV/EBITDA multiple of 15.9x against industry median of 7.8x, and Forward EV/Sales multiple of 5.8x against industry median of 1.4x. Based on the aforesaid fact, we expect that a price correction is due in the stock. Hence, considering the aforesaid facts, we recommend a 'Sell' rating on the stock at the closing market price of CAD 163.71 on July 20, 2020.

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

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.