GFL Environmental Inc

GFL Environmental Inc (TSX: GFL) is a diversified environmental services company in North America, offering non-hazardous solid waste management, infrastructure & soil remediation, and liquid waste management services throughout Canada and in 27 states in the United States. 

Key highlights

• Event update: The company announced that it will release its fourth quarter and full year 2020 financial results and 2021 outlook after the market closes on 22^nd February 2021.

• Acquisitions paying rewards:The acquisitions made by the company in the past are paying handsome reward, as a result; the company posted healthy growth in its total revenue in Q3 2020, which increased by 15.4%. On October 1, 2020, the company made another acquisition in the form of WCA Waste Corporation and its subsidiaries for aggregate consideration of CAD1,616.7 million. The purchase price for the acquisition was partially funded with the net proceeds of the 3.750% 2025, Secured Notes and the private placement of USD600.0 million.

Source: Company

• Increasing Cash flows: Cash flow from operating activities saw an increment by 214.2% to CAD 256.7 million in Q3 2020 compared to Q3 2019. This increase was predominantly attributable to improved working capital, an increase in Adjusted EBITDA and reduced interest expense during the period.

Source: Company

• Healthy balance sheet:The company is managing its balance sheet under good health. Having a cash balance of more than CAD 1.8 million as on September 30, 2020, reduced their long-term debts to CAD 6 billion, compared to CAD 7.5 billion as on December 31, 2019. The company has a revolving credit facility of totalling CAD628.0 million and USD40.0 million of which USD20.0 million was drawn as on September 30, 2020.

Financial overview of Q3 2020 (In millions of CAD dollars)

Source: Company

• In Q3 2020, the company’s revenue increased by CAD 138.0 million to CAD 1.03 billion compared to CAD 898 million in the previous corresponding period. The increase is primarily attributable to the revenues derived from acquisitions.
• Cost of sales as a % to revenue in Q3 2020, came down to 88% at CAD 909.5 million, as compared to 90% at CAD 807.8 million in Q2 2020.
• The company posted a net loss of CAD 114.7 million in the reported quarter, as compared to a loss of 110 million, partially offset by lower interest and other finance costs.

Risks Associated to Investment.

Public health outbreaks, epidemics or pandemics, such as the COVID-19 pandemic, is not the only risk associated with the business which could adversely impact the business of the company, other risks are also there such as increases in labour, disposal, and related transportation costs; fuel supply and fuel price fluctuations, etc.

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The Company, however, experienced lower sales volume in its liquid waste business resulting from the temporary suspension of specific customers operations and deferral of capital expenditures to mitigate the impact of COVID-19. The improving macro conditions would be favourable for the Company as the industries have started working on a regular course taking health precautions. The recent acquisitions have already begun giving healthy signals in terms of revenues. Also, the Company got opportunities to enhance their geographical reach. With a strong balance sheet, available liquidity, the group is well-positioned to continue to pursue strategic and accretive opportunities. Based on the rationales discussed above and valuation, we have given a “Hold” rating at the closing price of CAD 37.70 on February 2, 2021. We have considered Clean Harbors Inc, Republic Services Inc, Waste Connections Inc, etc. as the peer group for the comparison.

1-Year Price Chart (as on February 02, 2021). Source: Refinitiv (Thomson Reuters)

West Fraser Timber

West Fraser Timber (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.

Key highlights

• Acquired Norbord: On 1st February 2021, the group announced that it had completed the previously announced transaction of acquiring all issued and outstanding common shares of Norbord. Under the terms of the Transaction, Norbord Shareholders received 0.675 of a common share of West Fraser for each Norbord Share held.

• Getting listed on NYSE with a new symbol "WFG": The company received the New York Stock Exchange's approval to list its shares on the NYSE under the stock symbol "WFG" and commenced its trading from 1st February 2021. Concurrent with the commencement of trading on the NYSE, the company's stock symbol on the Toronto Stock Exchange will be changed to "WFG" from "WFT". 

• More stable cash flows and increased resilience:We feel that this transaction would add a healthy cash flow generating OSB business to West Fraser's existing portfolio, with increased scale, and diversity across products and end uses, geographies, and markets. This would also firmly establish West Fraser as a leader in the global wood products industry.

• Healthy liquidity: The company reported liquidity of CAD 1,346 million as on 30^th September 2020, which was at the highest level since 2017. Meanwhile, the company has repaid a revolving credit facility during the reported quarter, which is impressive. Furthermore, the next maturity date for its revolving credit will be around the second half of FY22, which would likely to support the company’s working capital requirements as well.

Source: Company 

Financial overview of Q3 2020 (in millions of Canadian dollars)

Source: Company 

• In Q3 2020, the Company reported sales of CAD 1,690 million, increased by 42% as compared to CAD 1,190 million in the previous corresponding period. The rise in sales was primarily due to an increase in lumber prices and higher SPY volumes.
• Operating earnings in Q3 2020 has shown a turnaround and stood at CAD 487 million as compared to a loss of CAD 54 million in pcp. The reasons for this turnaround were higher sales and low cost of product sold.
• The Company reported a net income of CAD 350 million in Q3 2020, as compared to a loss of CAD 45 million in Q3 2019. Primarily due to the reasons discussed above. 

Risks associated with investments

International lumber prices are trading at historical peak, which might lead to a decline in US home construction due to rising cost, and subsequently lead to a lower demand scenario, affecting the total shipment volume.

Valuation Methodology (Illustrative): Price to Earnings 

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The Company’s lumber and plywood facilities are operating near its full capacity to meet market demand. In the reported quarter the Company witnessed strong demand for lumber and plywood products, resulting in higher product prices. Repair and renovation activity and related demand also continued to trend positively. We feel that the housing market indicators, including new home starts, available for sale inventory, and mortgage rates will support the healthy demand for wood products. The Company has also added a healthy cash flow generating OSB business to its existing portfolio. We feel that increased scale, and diversity across products and end uses, geographies, and markets will firmly establish West Fraser as a leader in the global wood products industry. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing price of CAD 84.27 on February 2, 2021. We have considered Cascades Inc, Canfor Pulp Products Inc, Western Forest Products Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Stella-Jones Inc

Stella-Jones Inc (TSX: SJ) manufactures and sells lumber and wood products. The group sells products through five products categories. The corporation derives its major revenue from its railway ties category which sells pressure-treated lumber to the railway industry.

Key Highlights:

• Result-Update: The group would report its fourth quarter FY20 result on March 10, 2020.

• Bullish Indicators: The stock of SJ closed at CAD 48.1, above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend. Moreover, the stock appreciated ~36% and ~22% in the last six months and one year, respectively, supported by improved demand dynamics of the sector.

Source: Refinitiv (Thomson Reuters)

• Sequential Quarter Improvement: Despite a lower income, the group reported strong sequential growth in gross profit, operating income and net profit to CAD 147 million, CAD 113 million and CAD 79 million, respectively, compared to CAD 131 million, CAD 101 million and CAD 69 million in Q2FY20, respectively, which indicates strong operational efficiency.

Q3FY20 Financial Highlights:

• SJ announced its quarterly results, wherein the group posted revenue of CAD 742 million, higher than CAD 631 million in the previous corresponding period (pcp). The growth was driven by 14% y-o-y higher revenue from pressure-treated segment coupled with a significant rise in the market price of lumber.
• Operating income surged to CAD 113 million, as compared to CAD 78 million in Q3FY19, thanks to a higher sale and a lower cost of sales (CAD 595 million versus CAD 521 million in pcp)
• Net income stood higher at CAD 79 million, significantly higher than CAD 54 million, a year ago.
• At the end of Q3FY20, the company reported accounts receivable of CAD 347 million while total assets were recorded at CAD 2,483 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The company is susceptible to a variety of risks including general economic and business conditions, including the impact of the outbreak of the coronavirus pandemic, evolution in customer demand, product selling prices, availability and cost of raw materials, and changes in foreign currency rates.

Valuation Methodology (Illustrative): Price to Cash Flow

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

The group reported solid growth in its cash from operations at CAD 201 million, considerably higher than CAD 73 million in pcp. The group also reported a strong growth within the United States region, driven by higher traction from the utility poles and residential lumber segments. Moreover, within the utility segment, the company enjoys competitive advantages supported by an extensive distribution network, coupled with stable supply phenomenon, which is impressive. The scope of growth within the utility pole segment remains positive, as 150MM poles in North America are wood based. The company remains as an Industry leader within the pressure treated railroad ties and timber segments and caters more than10 million crossties per year, which is a key positive as well. The Company guided its FY20 EBITDA within the range of CAD 365 million to CAD 375 million, while EBITDA margin is expected higher than FY19, driven by improved realized prices coupled with a slide in the raw material prices. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Stantec Inc, WSP Global Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 48.10 on February 2, 2021.

1-Year Price Chart (as on February 02, 2021). 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.