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 majority of the revenue from the railway ties category, which sells pressure-treated lumber to the railway industry.

Management Update:

On December 01, 2020, the company announced the appointment of Ms. Anne Giardini to its Board of Directors.

Key Highlights:

• Balanced Product Portfolio: The company’s revenue does not depend on a single product category, and is distributed among Utility Poles, Railway Ties and Residential Lumber, which acts as a risk-diversification and stable revenue generation.                              

Source: Company Reports

• Growth in Financials: The company has a strong presence within North America and is a leading supplier of Pressure Treated Wood Products. Over the years, the company has delivered consistent growth in its financials through several prudent acquisitions, which have resulted in higher customer service, flexibility and emergency response and also the company’s ability to bid on larger projects. We believe the future growth would be driven by a broadening product line and expansion of the distribution network across North America.

Financial Metrics (Source: Company Presentation)

• Increase in Dividend: The company has increased its dividend per share for the 16^th year, which is a key positive and indicates sustainable cash flow growth driven by strong operational resiliency. We expect the momentum to continue in the foreseeable future driven by the increase in demand of board feet used for treated residential lumber and within the electrical utility and telecommunications lines.

Source: Company Presentation

Q3FY20 Financial Highlights:

• Stella-Jones declared its third quarter results, wherein the company reported revenue of CAD 742 million, reflecting a growth of 18% on y-o-y basis. The increase was primarily driven by higher traction across the pressure-treated wood segment due to a higher residential lumber sale, supported by elevated lumber prices and strong demand dynamics, coupled with incremental volumes and price realization for utility poles.
• EBITDA stood at CAD 132 million, significantly higher from CAD 96 million in Q3FY19, while EBITDA margin improved to 17.8% from 15.2% in pcp. The growth was primarily driven by improved realized prices and improved demand from high-margin products.
• Net income stood higher at CAD 79 million, versus CAD 54 million, a year ago.
• At the end of Q3FY20, the company reported its inventories of CAD 968 million and total assets at CAD 2,483 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: 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 Earnings based

*Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters) 

Stock Recommendation:

SJ expects its FY2020 EBITDA growth would be driven by higher residential lumber and utility poles product categories. The Company forecasts its FY20 EBITDA within the range of CAD 365 million to CAD 375 million while EBITDA margin is expected to improve compared to FY19, which is encouraging. Capital expenditures are expected to remain in between CAD 45 million to CAD 55 million in FY20. The stock closed above the immediate support levels of 30-days, 150-days and 200-days simple moving average (SMA), indicating a bullish trend. We have valued the stock using Price to Earnings based relative valuation approach and arrived at a target price offering single-digit upside side potential (in % terms). We have considered peers like Stantec Inc, Acadian Timber Corp, etc. Considering the above-mentioned facts, we have given a ‘Hold’ rating on the stock at the current closing price of CAD 45.89 on December 15, 2020.

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

Constellation Software Inc.

Constellation Software Inc. (TSX: CSU), is engaged in the development, installation, and customization of software. The company acquire, manages, and builds vertical market software (VMS) businesses. The Company is catering its services to both the public sector, and the private sector.

Key highlights

• Increase in Free cash flows:In Q3 2020, the company reported an increase in its cash flows from operations by USD 57 million or 32% to USD 234 million compared to USD 177 million in the previous corresponding period. Free cash flow available to shareholders also increased by USD 47 million to USD 181 million compared to USD134 million in pcp.

Source: Company

• Focusing on inorganic growth: Recently, the company acquired Topicus.com B.V., a Netherlands-based diversified vertical market software provider. The group is working towards a public listing of Topicus.com and expects to distribute its shares to Constellation's shareholders. The group's subsidiary made another acquisition "SSP Limited", a global supplier of technology systems and software for the insurance industry. We believe these acquisitions would enhance the Company's presence into new geography and likely to help in revenue growth.
• Healthy Liquidity:On the back of healthy operations, the company reported an increase in its cash balance by USD 249 million to USD 565 million at September 30, 2020, compared to USD 316 million at December 31, 2019. The group also decreased its bank indebtedness by USD 104 million to USD 176 million in Q3 2020, compared to USD280 million at December 31, 2019.

Financial Overview of Q3 2020 (In millions of U.S. dollars, except per share amounts)

Source: Company 

• In Q3 2020, the Company posted a robust set of numbers, wherein it reported a revenue of USD 1,003 million, an increase of 15%, compared to USD 870 million in Q3 2019, primarily due to growth from acquisitions, partially offset by negative organic growth of 1%, as due to COVID-19 the travel restrictions impacted the group’s ability to implement software.
• Total expenses reported by the group increased 8%, to USD 697 million, compared to USD 647 million in Q3 2019. Expenses as a percentage of total revenue improved and stood at 70% in Q3 2020, compared to 74% in Q3 2019.
• Based on the rise in revenue numbers as well as curtailed expenses in Q3 2020, the Company posted Net income of USD 122 million compared to net income of USD 82 million in the previous corresponding period.

Risk associated with investment

A further breakout of COVID-19 might result in cancellation by individual customers of their ongoing software maintenance contracts and the suspension or revocation of new software purchases. The pandemic may also harm many of the customers, including their ability to fulfil ongoing payment obligations to the company, which could increase the company’s bad-debt exposure.

Valuation Methodology (Illustrative): Price to Cash Flow

All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

In Q3 2020, the company posted a robust set of numbers, with ample liquidity in the balance sheet along with positive free cash flow available for shareholders of USD 181 million, which allows the company to expand their wing in new territories through acquisitions. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 1640.61 on December 15, 2020. We have considered Open Text Corp, Intuit Inc, Enghouse Systems Ltd, etc. as the peer group for the comparison.

1-Year Price Chart (as on December 15, 2020). Source: Refinitiv (Thomson Reuters)

Transcontinental Inc

Transcontinental Inc (TSX: TCL.A), is a printing company. It has operations in print, flexible packaging, publishing, and digital media, both in Canada and the United States. Its segments include the Packaging Sector, the Printing Sector and the Media Sector.

Key highlights 

• An income play: The company has a strong history of dividend distribution, which establishes the fact that the company’s business is resilient and has reported stable cash flows over the years. On December 9, 2020, the company declared a quarterly dividend of CAD 225 per share on Class A Subordinate Voting Shares, payable on January 19, 2021, with a record date of January 5, 2020. At the last closing price, the stock was offering a dividend yield of 4.05%, which is lucrative considering the current interest rate environment.

Source: Company 

• Curtailing long term debts: The company improved its net indebtedness ratio to 1.9x, by decreasing the long-term debt by CAD 235.5 million. This decrease was primarily due to the generation of cash from operating activities and the sale of the paper packaging operations, which were partially offset by lease liabilities.

Source: Company

• Healthy financial position:The company has maintained a stable financial position with liquidity of CAD 241.0 million along with access to unused lines of credit of CAD 432.8 million. On a consolidated basis the liquidity stands at CAD 673.8 million. 

• Disposing of non-core assets: The company completed the sale of its paper and woven polypropylene packaging operations to Hood Packaging Corporation for a price of approximately CAD 235.3 million.

Financial overview

Source: Company 

• In Q4 2020, the company reported revenue declined by 17.1% to CAD 655.7 million, as compared to CAD 791 million in Q4 2019. This fall was primarily due to lower volume in the Printing Sector, mostly due to the impact of COVID-19 pandemic, and the disposal of paper packaging operations.

• Adjusted operating income increased by 3.1%, to CAD 110 million, as against CAD 106.8 million in Q4 2019. This increase was mainly attributable to organic growth in operating earnings in the Packaging and Media sectors, partially offset by the disposal of the paper packaging operations.

• The company reported Adjusted Net earnings of CAD 72.4 million, as compared to CAD 70 million in the previous corresponding period. This increase was primarily due to a decrease in net financial expense, combined with organic growth in operating earnings in the Packaging and Media sectors.

Risk associated with investments 

The company might witness a margin pressure due to the higher resin costs and other raw material costs. Furthermore, the business might witness an organic decline within the printing sector which might affect the performance of the company.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock recommendation 

The group reported a decent result amid a challenging time. This performance is an indication of the group’s growth potential and reflects the resilience of the business model. The company’s significant source of growth comes from the packaging segment, which posted a robust improvement in profitability compared to last year on better operational efficiencies. With a solid financial position, the company is generating significant cash flows, which enabled the group to reduce the indebtedness level significantly. Therefore, based on the above rationales and valuation, we have given a ‘Hold’ recommendation at the closing price of CAD 22.25 on December 15, 2020. We have considered Quebecor Inc, Corus Entertainment Inc, Aecon Group Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

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