Acadian Timber Corp

Acadian Timber Corp. (TSX: ADN) is a supplier of key forest products in Canada and the United States. The company is also engaged in owning and managing a forest nursery in New Brunswick. The firm has roughly 2.4 million acres of land under management and has operations in New Brunswick and Maine. The majority of the income is generated from New Brunswick. 

Key highlights

• An income Play: Irrespective of economic cycles, the company has paid a consistent dividend, which is key positive from an income investor’s standpoint and indicates stable cash flow from the operations. ADN paid total dividend of CAD 14.518 million during the first nine-months of FY19, at par with the previous corresponding period. At the last traded price, the AND stock was offering a dividend yield of ~7.98%, which is lucrative considering the current interest rate environment.

10-years Dividend Payment History (Source: Company Reports)

• Positive Macro Scenario: The demand for softwood sawlog is expected to increase across the North American market in FY21, supported by higher housing construction, favorable demographics, lower interest rates and old, underbuilt housing stock. Biomass markets across the New Brunswick are likely to be supported by stable demand in the foreseeable future.

Q3FY20 Financial Highlights:

• ADN announced its quarterly results, wherein the company posted sales of CAD 23.236 million, lower than CAD 25.357 million in the previous corresponding period (pcp). The decline was majorly attributable to 9% y-o-y lower sales volume of 302.3 tonnes coupled with a 3% decline in the weighted average selling price and sluggish demand for hardwood pulpwood. However, increased demand for softwood sawlogs, during the quarter, driven by a strong North American softwood lumber market partially supported the top-line.
• Adjusted EBITDA stood lower at CAD 4.514 million, as compared to CAD 5.123 million, a year ago, due to a lower sale, partially supported by a lower cost of sales and selling, administration and other expense. Meanwhile, the company retained its adjusted EBITDA margin at ~19%, close to ~20%, a year ago.
• Net income stood at CAD 5.248 million, against a net loss of CAD 10.869 million in pcp, due to inclusion of Management agreement termination fee amounting CAD 18 million in the previous corresponding period.                   

Q3FY20 Income Statement Highlights (Source: Company Reports)

9MFY20 Segment Performance:

Segment Highlights of New Brunswick Timberlands (Source: Company Reports)

Segment Highlights of Maine Timberlands (Source: Company Reports)

Risks: Sluggish demand for wood products might result in higher inventory levels, which might restrict the capacity utilization of the company. Furthermore, a continuation of the ongoing weak hardwood pulp demand might dampen the sales volumes of the company.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation:

The company has a strong balance sheet and reported CAD 20.4 million of net liquidity as on September 26, 2020, which seems sufficient to withstand the current downturn. Moreover, due to product diversity, the group has able to retain operational performance in the recent past, which is impressive. The outlook for softwood sawlogs is positive, with an expected increase in North American softwood lumber consumption in 2021. Local markets for hardwood sawlogs are expected to strengthen for the remainder of the year as less product is produced in light of weak hardwood pulpwood markets, matched with strengthening demand for hardwood lumber. Hardwood and softwood pulpwood demand is expected to remain weak for the remainder of the year until hardwood pulp markets improve, and regional supply is brought in balance with demand. We have valued the stock using Price to CF based relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered Mercer International Inc, Resolute Forest Products Inc and CanWel Building Materials Group Ltd. as a peer group. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 14.56 on November 4, 2020.

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

Canfor Pulp Products Inc.

Canfor Pulp Products Inc. (TSX: CFX) produces and distributes northern bleached softwood kraft pulp, or NBSK pulp and paper. The Company has two operating segments, namely, pulp and paper and derives the majority of the revenue from the pulp segment.

Key Highlights:

• Ample Liquidity: The company has maintained ample liquidity, amidst distorted macro-economic condition. At the end of Q3FY20, the company reported liquidity of CAD 130 million, which seems adequate to pass through this challenging time. Further, the company does not have any scheduled debt maturity in FY21. Further to preserve its liquidity levels, the company took the prudent decision by suspending all non‐essential overhead, tight cash management and taking Government’s support etc.

Liquidity and Scheduled Maturities (Source: Company Presentation)

• Improved Demand Dynamics: The management expects a gradual recovery in global softwood pulp demand in the coming quarters. Furthermore, the management believes a steady recovery of the pulp prices during in 2021, which would bolster the group’s top-line performance.

Q3FY20 Financial Highlights:

• CFX posted revenue of CAD 226.4 million, higher than CAD 216.9 million in the previous corresponding period (pcp). The improvement was primarily due to a forex gain; however, the corporation reported setbacks from scheduled maintenance downtime, stemming from the ongoing impact of the coronavirus and materially impacted residual fibre supply to the Company's Prince George based operations.
• Adjusted operating loss stood lower at CAD 30.6 million, as compared to a loss of CAD 44 million in Q3FY19.
• Global pulp market conditions remained weak during the current quarter, coupled with sluggish demand for printing and writing papers, which has also taken a toll on demand surge for tissue products.
• Net losses declined to CAD 18.1 million, from CAD 32.4 million, a year ago.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: Lower demand offtake for paper products in the wake of the sluggish economic outlook is the major risk the company is facing at present. Also, continued weakness in the demand offtake of paper products could weigh on the group’s performance.

Valuation Methodology: EV to EBITDA Based (Illustrative)

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

Stock Recommendation: The stock of CFX declined ~32% in the last six-months, due to the seasonally slower summer months coupled with a tepid sectoral scenario on account of COVID 19 pandemic. However, despite challenging market condition, the company reported a higher top-line, and a lower net loss, owing to several operational efficiency measures adopted in the recent past. We believe, an improved demand scenario within the pulp segment over the next few quarters would likely to support the company’ top-line. We have valued the stock using EV to EBITDA based relative valuation method and arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Western Forest Products Inc, Canfor Corp etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 4.70 on November 04, 2020.

1-year Price Chart (as on November 04, 2020, after the market close). 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.