Acadian Timber Corp

Acadian Timber Corp (TSX: ADN) is a Canada-based supplier of primary forest products in Eastern Canada and the Northeastern United States. The company's operating segments include NB Timberlands and Maine Timberlands and generates maximum revenue from the NB Timberlands segment. Its product includes softwood and hardwood sawlogs, pulpwood and biomass by-products.

Key highlights 

• An income play: The group continues with a track record of dividend distribution despite the challenging environment; this shows its financial strength and suggests that it is a friend of income investors. Recently the group declared a quarterly dividend of CAD 0.29 per share, Payable on July 15, 2021. Moreover, at the last closing price, the stock was offering a dividend yield of 5.94%, which is lucrative, considering the current interest rate environment.

• Optimistic macro scenarios: The management expects that softwood sawlogs' demand would boost with an anticipated increase in North American softwood lumber consumption in 2021 mainly due to continued strong repair and remodeling activity and a revival in home construction. Low interest rates, old and underbuilt housing stock, and favorable demographics are supporting this outlook.

• Industry beating margins: The Company maintained its pace and witnessed spirited performance across its margin matrix. In addition, the management’s solid determination helped them leap the industry median margins on many fronts in Q1 2021, which exhibits the competitive advantage of the company within the industry. The chart below gives a glimpse of this. 
  

• Management Changes: Recently, the Chairman of the Board Mr. Malcolm Cockwell stated that Acadian’s current Chief Financial Officer Mr. Adam Sheparski will be promoted to President and Chief Executive Officer of Acadian effective July 30, 2021, and Ms. Susan Wood will become Chief Financial Officer.
  

Financial overview of Q1 2021

Source: Company 

• In Q1 2021, the company reported revenues of CAD 25.9 million, against CAD 31.4 million in the previous corresponding period. The fall in revenues was mainly due to lower sales volume primarily due to temporary road closures caused by unusually mild weather, reduced trucking capacity in Maine, and lower pulpwood sales.
• The company posted operating income of CAD 6.7 million in the reported period compared to CAD 8.2 million in pcp. Although the company posted lower operating income, but it managed to bring down its operating expenses, which was key positive.
• The company reported a decline in the net finance expense at CAD 0.75 million from CAD 1.2 million in pcp.
• Net earnings stood higher at CAD 5.8 million, compared to a net loss of CAD 3.7 million in pcp, primarily due to an unrealized gain of CAD 1.2 million against a loss of CAD 8.2 million in pcp.

Risks associated with investment

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

Stock recommendation

On the back of product diversity, the group maintained operational performance in recent times, which is impressive. The company expects strong demand for softwood sawlogs in the North American market in FY-2021, on the back of, lower interest rates and old, underbuilt housing stock with higher housing construction activities. On top of all, the stock carries a healthy yield of 5.940%, which is impressive and can be a crucial factor for long-term investors. Based on technical analysis, the stock has support at CAD 16.0 level. On the valuation front, the stock is available at a forward price to cash flow multiple of 1.96x, which is significantly lower compared to the industry (Paper & Forest Products) median of 4.54x. Therefore, considering the above rationale, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 19.53 on June 14, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock if the price closes below the support level.

One-Year Technical Price Chart (as on June 14, 2021). Analysis by Kalkine Group

Medipharm Labs Corp.

Medipharm Labs Corp. (TSX: LABS), is a Canada-based medicinal cannabis company specializing in the pharmaceutical grade production of cannabis. The Company is focused on distillation and cannabinoid isolation and purification. 

Key Highlights

• Extends strategic partnership with ADREXpharma: ADREXpharma, a prominent manufacturer and distributor of medical cannabis in Europe, recently renewed the supply arrangement with MediPharma. The group provides ADREX with high-quality, purity-assured THC and CBD cannabis products for sale and delivery to roughly 19,000 pharmacies in Germany, meeting escalating patient demand in the booming German Medical Cannabis Market that saw sales increased 34% last year. As a result, MediPharm completed its first shipment of cannabis product to ADREX in Q1 2021 and is on track to deliver its subsequent shipments to Germany in Q2 2021.
• Established Global Pharmaceutical Strategy: The organization increased its licenses, worldwide regulatory authorizations, and product registrations with health authorities in Q1 2021 to enable future sales via established worldwide pharmaceutical and medical channels.
• Increased Domestic Presence: With the retail debut of CBD 100 Ultra Formula Oil, THC30 Plus Formula Oil, and CBN1:2 Nighttime Formula, the Company's first cannabinoid cannabinol rich formula, was sold out in Ontario, and it expanded its family of branded goods. The group also extended distribution to additional shops and added new listings and goods to the Ontario Cannabis Store.
• Reduces loans and borrowings: As of March 31, 2021, the company minimized its current liabilities to CAD 3.4 million from CAD 7.6 million, while non-current liabilities stood at CAD 0.14 million against CAD 10.7 million on December 31, 2021. We believe by reducing the loan and borrowing, the company would benefit from the reduced finance expenses.

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the company posted revenue of CAD 5.4 million, down by 51% compared to CAD 11.0 million in Q1 2020. The lower sale was due to the decrease in bulk concentrate volumes and was also impacted by lockdowns and channel inventory reductions with provincial distributors.

• The gross loss of CAD 0.68 million was recorded in Q1 2021, against a gross loss of CAD 10.9 million in the previous corresponding period, primarily due to the lower revenue. 

• The company posted lower operating expenses, resulting in minimizing the operating loss at CAD 7.9 million compared to a loss of CAD 21.9 million in the previous corresponding period.

• The company reported a net loss of CAD 13.8 million, compared to a net loss of CAD 17.3 million in Q1 2020. The group witnessed higher interest expense at CAD 9.7 million V/s CAD 0.2 million in pcp, partially offset by an unrealized gain in the revaluation of derivative liabilities by CAD 3.7 million.
  

Risks associated with investment

Several risk factors could impact the company’s ability to execute its key strategies successfully and materially affect financial performance. Some of these risks include reliance on licenses and authorization, disruption in the supply chain, inability to sustain pricing and inventory models, lack of long-term client commitments, etc.

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

In 2021, the firm set out to develop itself as a pharmaceutical firm while ramping up and significantly increasing its overseas sales. It recently extended its supply arrangement with ADREXpharma to meet increased patient demand in Germany's expanding medical cannabis market, which saw sales rise 34% last year. The Company anticipates product sales to improve in the future and higher sales to the worldwide pharmaceutical, medical, and wellness sectors. The management also noted that they would maintain their discipline in managing spending and deploying the balance sheet, citing the recent reduction in liabilities as a critical positive. In addition, they made substantial progress actively managing its cost structure which led to a 30% expense reduction and remains focused on returning to profitability. Based on technical analysis, the stock has support at CAD 0.42 level. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating at the closing price of CAD 0.51 as of June 14, 2021. We have considered Valens Company Inc, Hexo Corp, Auxly Cannabis Group Inc, etc. as the peer group for the comparison. 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-Year Price Chart (as on June 14, 2021). Source: Analysis by Kalkine Group

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

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.