Western Forest Products Inc.

Western Forest Products Inc (TSX: WEF) is a Canada-based softwood forest products company which is engaged in the activities like timber harvesting, reforestation, forest management, sawmilling logs into lumber and wood chips, and value-added lumber remanufacturing.

Key Highlights:

• Reduction in borrowings: The company has consistently reduced its total borrowing in the last few quarters, which indicates prudent capital management. The company became virtually debt free in Q1FY21 and reported a negligible total debt of CAD 2.5 million, as compared to CAD 71.7 million in Q4FY20.

Source: Company Presentation

• Ample Liquidity: The group’s liquidity level has been rising since Q2 19, where the available liquidity increased from CAD 134 million to CAD 244 million in Q1 21. The available liquidity seems to be sufficient to meet company’s working capital requirement and other current liabilities.

Source: Company Presentation

• Elevated Lumber prices Supported EBITDA Margin: Since 2016, the group saw a constant growth in the EBITDA margin (expect period between Q2FY19 to Q1FY20 due to strike), supported by elevated lumber prices. Historically, the company recorded a higher price than the existing Commodity Lumber Price, which indicates strong pricing power.

Source: Company Presentation

Q1FY21 Financial Highlights:

• WEF announces its quarterly result, wherein the company posted revenue of CAD 322.5 million, significantly higher than CAD 99.1 million in the previous corresponding period (pcp). The increase was mainly attributed to growth in new home construction coupled with a surge in repair and renovation activities across North America.
• The group reported an operating income of CAD 65 million, as compared to an operating loss of CAD 27.2 million in Q1FY20. The change was primarily due to higher revenue, partially offset by a higher cost of goods sold, increase in the freight costs coupled with higher selling & administrative expenses.
• Net income stood at CAD 53.8 million, as compared to a net loss of CAD 21.0 million in the previous corresponding period (pcp).

Q1FY21 Income Statement Highlights (Source: Company Report)

Risk: The primary driver of lumber is the construction and remodeling of housing across North America, and hence, a change in building activities would affect the demand for lumber and subsequently drag the lumber prices. Such a trend would result in a lower realization and subsequently impact the income.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

In the recent past, we have seen a surge in the construction of housing activities, supported by record-low interest rate, which has resulted in an upthrust in lumber prices. North American housing construction activity is expected to grow at a CAGR of ~3.7% till 2024, while the demand of North American lumber is expected to grow at CAGR of ~3.3% till 2024. This is a key positive as it is likely to support the lumber prices. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Domtar Corp, Canfor Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of WEF at the closing price of CAD 1.99 on June 10, 2021.

One-Year Technical Price Chart (as on June 10, 2021). Analysis by Kalkine Group

Taiga Building Products Ltd.

Taiga Building Products Ltd (TSX: TBL) is a Canada based company, which is engaged in the production and wholesale distribution of building products. The company’s products range includes composite decking, engineered wood, flooring, insulation, lumber, moduling, panels, polyethylene, preserved wood, roofing, and siding.

Key highlights:

• Decline in Total Debt: The company reported a decline in its total debt to CAD 7,827 million in Q1FY21, reflecting a fall of ~18% over Q1FY20. This indicates prudent capital management and is likely to improve the overall financial flexibility of the company. In addition to this, the company also recorded a lower interest expense in Q1FY21, which has supported the company bottom line.
  

• Recovering macros to support the company’s upcoming performance: The group mainly caters to construction and housing activities. In the recent past, the housing sector across North America witnessed revival primarily from the detached housing segment due to lower cost of borrowings. Hence, the commodity prices, primarily the building products, has spurred in the recent past, which has resulted in higher realization prices and subsequently driving the company’s cash flow and income, respectively.
  

Q1FY21 Financial Highlights:

• TBL announces its quarterly results, wherein the company posted sales of CAD 535.918 million, as compared to CAD 320.279 million in the previous corresponding period (pcp). The growth was supported by improved commodity prices for the building material driven by a surge in housing construction.
• Gross margin soared CAD 90.358 million, as compared to CAD 30.553 million in Q1FY20, thanks to elevated revenue, partially offset by higher cost of sales (CAD 445.560 million v/s CAD 289.726 million in Q1FY20).
• The quarter was marked by higher distribution cost (CAD 7.054 million v/s CAD 6.400 million pcp) and significantly higher selling and administration cost (CAD 41.156 million v/s CAD 13.764 million in pcp). However, a lower finance cost (CAD 1.673 million v/s CAD 2.277 million in pcp) also supported the profitability.
• Net earnings for the year stood at CAD 29.176 million, as compared to CAD 6.613 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Reports)

Risks: The company reported significantly higher selling and administrative expenses during the quarter, which is a reason for concern and continuation of the above trend would dampen the company’s profitability. Moreover, a fall in building products prices due to lower construction activities would also hamper the company’s performance.

Stock Recommendation:

Adjusted EBITDA surged to CAD 45.107 million, from CAD 13.092 million in the previous corresponding period, which shows robust profitability growth. We expect the demand for housing and building materials to remain high in the coming quarters, supported by strong housing growth across North America, which is a key positive. On the valuation front, the stock is available at a TTM price to earnings multiple of 3.2x, as compared to the industry (Basic Materials) average of 8.0x. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of TBL at the closing price of CAD 2.76 on June 10, 2021.

One-Year Technical Price Chart (as on June 10, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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