West Fraser Timber Co. Ltd.

West Fraser Timber Co. Ltd. (TSX: WFT) 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.

Investment Rational:

• Demand for wood product to remain favourable: Throughout the third quarter, demand for lumber and plywood products remained strong, resulting in higher product prices. Repair and renovation activity and related demand also continued to trend positively. Housing market indicators, including new home starts, available for sale inventory, and mortgage rates, support the continued expectation of healthy demand for wood products. Despite recent volatility, the longer-term outlook for growth in wood products consumption appears favourable.
• Improved Liquidity: The company reported liquidity of CAD 1,346 million as of September 30, 2020, the highest level since 2017. Meanwhile, the company has repaid a revolving credit facility during Q3FY20, 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.

Liquidity Levels (Source: Company Presentation)

• Elevated Lumber Price and Cost-efficiency to support Margin: Due to the increase in demand, prices of SPF (spruce-pine-fir) and SYP (southern yellow pine) has remained elevated, which augurs well for improved top-line. Furthermore, with reduced costs, higher operating rates and productivity, the group is poised to report improved margins in the coming days.

Historical Price trend of SPF and SYP (Source: Company Presentation)  

Q3FY20 Financial Highlights:

• Q3FY20 sales stood at CAD 1,690 million, reflecting a growth of 32% on y-o-y basis, driven by an increase in the lumber prices and higher SYP volumes, while a lower SPF shipment volume remained a drag.
• WFT impressed with its operating earnings, which stood significantly high at CAD 487 million, as compared to an operating loss of CAD 54 million in Q3FY19, supported by an increase in sales and a lower cost of products sold.
• Earnings grew to CAD 350 million, from a loss of CAD 45 million, in the previous corresponding period (pcp), supported by improved operating performance and a slightly lower finance expense.
• Cash and short-term investments soared to CAD 313 million from CAD 16 million in FY19, while total assets were recorded at CAD 4,973 million.                                                                                             

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: International lumber prices are trading at a historical peak, which might lead to a decline in US home constructions due to rising costs, and subsequently lead to a lower demand scenario, affecting the total shipment volumes.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation: Due to elevated lumber prices in the recent past, the stock of WFT soared ~78% in the last six months. We believe the demand for the lumber and wood products are likely to remain elevated in the coming days, and due to a limited supply scenario, the company retains a sweet spot within the wood products category. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Canfor Corp, Domtar Corp etc. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 62.8 on October 28, 2020.

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

Aurinia Pharmaceuticals

Aurinia Pharmaceuticals (TSX: AUP) is a late-stage clinical biopharmaceutical company which specializes in developing and commercializing therapies to treat targeted patient populations that are impacted by serious diseases with a high unmet medical need. 

Recent Highlights:

• On October 27, 2020, the company announced the funding and initiation of an open-label exploratory trial evaluating the antiviral effects of voclosporin in kidney transplant recipients with COVID-19 (SARS-CoV-2) – the VOCOVID study.
• Earlier, the company confirmed its last patient study visit has occurred in the Phase 2/3 AUDREY™ clinical study evaluating voclosporin ophthalmic solution (VOS) for the potential treatment of dry eye syndrome (DES). Voclosporin ophthalmic solution (VOS) results on track to be reported in the fourth quarter of 2020

Q2FY20 Financial Highlights:

• The company incurred a stable expense for its research and development at USD 11.076 million, as compared to USD 11.152 million in the previous corresponding period (pcp). However, corporate, administrative and business development costs were significantly higher at USD 15.541 million, as compared to USD 4.946 million in Q2FY19.
• Loss before change in estimated fair value of derivative warrant liabilities and income taxes stood at USD 26.552 million, significantly higher than the loss of USD 16.510 million in pcp, due to increase in the operating costs, higher finance costs, and a lower finance income.
• Net loss and comprehensive loss for the period stood at USD 29.526 million, as compared to USD 15.901 million in the previous corresponding period.
• Cash, cash equivalent and short-term investments stood at USD 264.35 million, while total assets stood at USD 295.278 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company is a late-stage clinical biopharmaceutical company and is yet to report its sales. The company is relying heavily on the success of voclosporin. Any set back to the desired result or a failure of the clinical trial would hamper the group’s prospect.

Stock Recommendations: The stock of AUP soared ~241% in last one year, as investors remained positive regarding the recent trials done by the company. The stock has closed above its 20-days, 30-days, 50-days, 10-days and 200-days simple moving average (SMA), indicating a bullish pattern. In addition to preparing for the launch of voclosporin for use as a potential treatment for lupus nephritis (LN), Aurinia continues to explore voclosporin in other proteinuric kidney indications and expects to provide an update on a planned clinical development program later this year. The company’s recent trial to kidney transplant recipients (KTRs) with COVID-19 (SARS-CoV-2) offers ample opportunity, and a successful trial would lead to higher business prospects for the company. Furthermore, the trial from the dry eye syndrome is subjected to FDA approvals. Based on the aforementioned facts, current trading levels, we recommend a ‘Speculative Buy’ rating on the stock of AUP at the closing price of CAD 21.13 on October 28, 2020.

AUP 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.