Acadian Timber Corp.

Acadian Timber Corp. (TSX: ADN), is a Canada-based supplier of primary forest products in Eastern Canada and the North eastern United States. The Company operates timberland in New Brunswick and Maine.

Event update: The Company will declare its financial results for the three months and year ending 31^st December 2020, on 11^th February 2021.

Key highlights

• An Income Play: The group continues with a track record of dividend distribution despite this challenging environment; this shows its financial strength and suggests that it is a friend of income investors. Recently the group paid a quarterly dividend of CAD 0.29 per share, on January 15, 2021. Moreover, the stock offers a dividend yield of 7.08% at the last closing price, 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. The consensus estimates suggest that 1.30 million housing starts in 2020 and would further increase to 1.37 million in 2021, supported by favourable demographics, lower interest rates and old, underbuilt housing stock. 

• Generating Free cash flows:On the back of the robust performance, the group garnered CAD 3.1 million of Free Cash Flow in Q3 2020. The group continues its focus on ensuring a strong cash position and financial flexibility. At the end of the reported quarter, the group’s balance sheet continues to be solid with the refinancing of the long-term debt and CAD 20.4 million of net liquidity, which includes funds available under the credit facilities.

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the company reported revenues of CAD 23.2 million, against CAD 25.3 million in the previous corresponding period. The fall in revenues was mainly due to lower sales volume and a lower weighted average selling price and sluggish demand for hardwood pulpwood.
• The group managed to minimize its S&A expenses in the reported quarter, which helped them clocking operating income of CAD 4.4 million, compared to 4.7 million in pcp.  
• The company posted a net income of CAD 5.2 million in Q3 2020, against a loss of CAD 10.8 million in Q3 2019. This rise in net income was due to gains on unrealized foreign exchange. 

Risk associated with investment

Sluggish 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. 

Valuation Methodology (Illustrative): Price to Cash Flow

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

On the back of product diversity, the group retained operational performance in recent times, which is impressive. The demand for softwood sawlogs would increase in the North American market in FY-2021, on the back of, lower interest rates and old, underbuilt housing stock with higher housing construction. This improving demand outlook is a big positive for the company. On top of all, the stock is offering a healthy dividend yield of ~7.08%, which is impressive and can be a crucial factor for long-term investors. Therefore, based on the above rationale and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 16.38 on January 26, 2021. We have considered Resolute Forest Products Inc, Mercer International Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Precision Drilling Corp

Precision Drilling Corp (TSX: PD) is Canada's significant player in contract drilling, which has expanded themselves into the United States with Grey Wolf and in the Middle East region, with more than 250 land rigs. The company offers completions, workover, maintenance, and abandonment services.

Event update: The Company will declare its financial results for the three months and year ending 31^st December 2020, on 10^th February 2021.

Key Highlights 

• Share Consolidation: Recently, the Company proceeded consolidation of its common shares at the ratio of 20:1. Following the coalition, the Company's number of outstanding common shares reduced from approximately 274.5 million to about 13.7 million outstanding common shares. 

• Debt Repayment: After additional open market repurchases of its unsecured senior notes in the fourth quarter, the group’s 2020 debt repayments totalled CAD 170 million, exceeding the high end of its 2020 annual targeted range of CAD 100 million to CAD 150 million. As a result of this, to some extent, the interest cost pressure is likely to be relieved.

Source: Company 

• Cash preservation & Cost control remains top priorities:In the current situation, when things have started improving, preserving cash is on top of the mind of the company’s management. Presently, they have a decent liquidity position of nearly CAD 700 million. Regarding preservation, the group reduced its cash spending by CAD 150 million in 2020, through reduced capital spending plan to CAD 48 million (down 50%), reduction in annualized fixed costs by 35%, includes over CAD 30 million reductions of G&A.

Source: Company

Financial overview of Q3 2020

Source: Company 

• The company showcased the revenue of CAD 165 million in 3Q 2020, decreased 56% compared to 3Q 2019 due to lower activities across all their operating segments.
• EBIT stood at 47.7 million in Q3 2020, against CAD 97.8 million in the previous corresponding period. The management took some prudent steps to minimize the G&A expenses; thus, they booked CAD 11.9 million in G&A expenses Vs CAD 21 million in pcp.
• The company's net loss in the reported quarter increased to CAD 28 million, against a net loss of CAD 4 million in 3Q 2019. The rise in net loss was primarily due to lower activities.

Risks associated with investment

There are many risks involved with the company, which can create a massive impact on the operations and financial health, such as fluctuations in the level of oil and natural gas exploration and development activities, changes in drilling and well-servicing technology, the impact of weather and seasonal conditions on operations and facilities, etc. 

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The energy industry continues to have a challenging outlook as pandemic has resulted in significant global oil supply imbalances and near-term crude oil price volatility. The trend is likely to improve as the oil industry would return to normalcy with a gradual recovery in demand. Through the technological digital apps, which are turning out to be a differentiator, the company seeks exceptional results-driven strong customer interest, which is a key positive. The company’s international projects in Kuwait and Saudi Arabia are likely to generate excellent results and cash flows. The company has taken a stance to reduce debts and preserve its cash by decreasing the rate of capex amount and annualized fixed costs are also going to help them grandly. Hence, based on the rationales discussed above and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 25.76 on January 26, 2021. We have considered Ensign Energy Services Inc, Nabors Industries Ltd, Western Energy Services Corp, etc. as the peer group for the comparison. 

Source: Refinitiv (Thomson Reuters)

Disclaimer

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