Demand Recovery from China to Thrust Shipments: Canfor Pulp Products Inc. (TSX: CFX) is engaged in manufacturing and distribution of northern bleached softwood (NBSK) pulp and paper. The Company’s end product includes tissue paper, specialty paper, and printing and writing paper. The group is extending spring maintenance shutdown at Northwood Pulp Mill amid COVID-19 outbreak.

Outlook: For FY20, volatility in demand is likely to persist due to supply disruptions in various regions. However, for the second quarter, the company expects a solid demand for tissues. Meanwhile, pricing is likely to support growth. However, weakness in writing and printing is likely to hurt its financials.

Q1FY20 Operating Highlights: For the period ended March 31,2020, CFX reported gross sales of CAD 275.5 million, as compared to CAD 247.5 million in previous quarter, driven by a ~9% increase in total shipments coupled with above expectation demand from China amidst COVID 19. Operating loss, on an adjusted basis, stood at CAD 4.6 million, as compared to an operating loss of CAD 26.5 million in the previous quarter. The sequential improvement was led by higher production and a subsequent decline in pulp input cost. Net income stood at CAD 7 million, witnessed a significant improvement from CAD 19.5 million in Q4FY19 on account of inclusion of CAD 10.7 million recoveries from inventory write-down. The company stated that it witnessed a major dip in global pulp markets in late February and into March. However, tissue marked robust demand. Energy revenues were up from the previous quarter, largely reflecting seasonally higher energy prices coupled with higher energy output.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock made a sharp recovery in the recent past, generating a ~35% return in one month, after being hammered for the last one year. The stock is trading above its 20 days simple moving average (SMA) of CAD 5.30. The Company significantly lowered its capex plan for FY20 in order to drive liquidity. Further, the cancellation of quarterly dividend augurs well for the preservation of cash flows in coming days. The company reported an improved ROE of 1.20%, as compared to a negative 3.4% in Q4FY19. CFX expects demand to recover in China with robust growth in the tissue segment. The stock is available at a lower valuation of EV/Sales of 0.4x, as compared to the industry median of 0.6x (Paper & Forest Products) on a TTM basis. Hence, we recommend a ‘Speculative Buy’ on the stock at the closing market price of CAD 5.57 as on April 23, 2020.

CFX Daily Price Chart (Source: Thomson Reuters)

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