Canfor Pulp Products Inc

Canfor Pulp Products Inc (TSX: CFX) produces and sells northern bleached softwood kraft pulp, or NBSK pulp and paper. The company also generates and sells electricity from biomass out of its pulp plants in Western Canada. The firm organizes itself into two segments based on product: pulp and paper. The pulp segment generates the majority of revenue.

Key highlights: 

• Robust operating income: The Company reported operating income of CAD 51.0 million for the second quarter of 2021, CAD 46.1 million higher than the operating income of CAD 4.9 million reported for the first quarter of 2021, reflecting materially higher Northern Bleached Softwood Kraft (“NBSK”) pulp unit sales realizations and increased shipments.
• Strong market environment: In the second quarter of 2021, worldwide timber market conditions were very robust, as restricted supply combined with strong demand drove global benchmark lumber prices to reach all-time highs. The impact of marginally increased log prices in Western Canada was significantly offset by this record pricing, which was paired with somewhat greater export quantities.
• High levels of new home construction activity: Strong performance continues, despite a little pull-back in the move to suburban regions as COVID-19 limitations were gradually eased, North American market fundamentals indicated continued high levels of new house construction activity. Early in the current quarter, demand in the North American repair and renovation industry was strong, however it slowed later in the quarter.
• Elevated operating cash flows: In the second quarter of 2021, cash generated from operational activities was CAD 62.2 million, up CAD 44.9 million from the first quarter of 2021 and roughly in line with the second quarter of 2020. Improved cash profits in the current quarter, and to a lesser degree, greater accounts payable and accruals obligations at the end of the current quarter, drove the rise in operational cash flows compared to the first quarter of 2021.
  

Financial overview of Q2 2021

Source: Company

• In Q2 2021, the company posted strong revenue at CAD 334.3 million compared to CAD 250.7 million in the previous corresponding period. The increase in revenue was mainly due to higher pulp unit sales realizations and increase in shipments
• Operating expenses for the reported period rose to CAD 283.3 million compared to CAD 257.0 million in pcp.
• On the back of robust revenue, the company’s operating income saw a substantial jump to CAD 51 million against a loss of CAD 6.3 million in pcp.
• Net income also rose to CAD 36.2 million against a loss of CAD 1.1 million in pcp, partially offset by higher income tax expense.
  

Risks associated with investment

The majority of the company’s revenue derived from the lumber segment, and a correction in the lumber prices would lead to lower realization, which may hinder the company’s cash flows and margins.

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The firm reported strong results in Q2 2021 and is encouraged by the improved operational and financial performance, which allowed it to take advantage of favorable pulp market pricing. The worldwide pulp market circumstances were steadier in the second quarter, following a dramatic improvement in market fundamentals earlier in the year. Furthermore, in the second quarter of 2021, global timber market conditions remained very robust, as limited supply combined with strong demand drove global benchmark lumber prices to new all-time highs. These supportive factors, we believe, will help the firm improve its cash flow in the future. Therefore, based on the above rationale and valuation, we recommend a “Speculative buy” rating in the stock at the closing price of CAD 6.58 on September 24, 2021. We have considered Interfor Corp, Canfor Corp, 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.

Technical Summary

One-Year Technical Price Chart (as on September 24, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Charlotte’s Web Holdings Inc

Charlotte’s Web Holdings Inc (TSX: CWEB) is a Canada-based company engaged in producing and distributing hemp-based cannabidiol (CBD) wellness products. Its product categories include ingestible products (tinctures, capsules, and gummies), topicals, and pet products.

Key highlights

• Robust B2B performance: In the second quarter of 2021, the company's consolidated revenue rose by 11.4% year over year to USD 24.2 million. Consumers returning to brick-and-mortar retail purchasing following the economic reopening from pandemic lockdowns drove up business-to-business (B2B) revenue by 37.7% year over year. Similarly, activity and revenue in the B2B healthcare practitioner ("HCP") and medical channels rose, aided by the Company's purchase of Abacus Health in June 2020.
• Accelerating national and international retail expansion: By focusing on client acquisition and retention, as well as speeding national and international retail growth, the Company hopes to capitalize on the rapidly growing CBD wellness products sector. In addition, it would be extending its product line beyond Industrial Hemp-based items, which is a key positive. Furthermore, it is also investing in research and development to find new product prospects. The management is looking for ways to increase manufacturing capacity, sales and marketing infrastructure, and gain more control.
• Planning to acquire Stanley Brothers USA Holdings, Inc.: Stanley Brothers USA Holdings, Inc. ("Stanley Brothers USA"), a cannabis wellness incubator, is a company that the Company has the option to buy. A collaboration with, or purchase of, Stanley Brothers USA would allow the Company to join the U.S. and/or worldwide cannabis wellness industry with an experienced and trusted team and brand (marketed under the name "ReCreate"), positioning it for possible new growth possibilities.

Financial overview of Q2 2021 (In thousands of United States dollars)

Source: Company

• In Q2 2021, the company posted higher revenue of USD 24.1 million against USD 21.6 million in pcp. The increase of 12% in the revenue was due to competitive pricing resulting in increased unit sales.
• On account of lower cost of sales, which decreased 19% to USD 8.3 million, the group’s gross profit rose to USD 15.8 million, against USD 11.4 million in pcp.
• The company reduced its operating loss in the reported period to USD 9.1 million, against a loss of USD 18.0 million, primarily due to higher gross profit and controlled operating expenses in the reported period.
• Net loss minimized to USD 5.3 million, against USD 14.4 million in pcp. The decline in net loss was mainly due to above discussed rationales. 
  

Risks associated with investment

The company’s products are relatively new to the market, and a change in consumer preference may impact the overall demand dynamics. Moreover, due to the lengthy procedure of product-approval and product innovations, along with an increase in the higher input costs, the company might witness a subsequent fall in the profitability and margins.

Stock recommendation

As many consumers moved from online purchasing to brick and mortar retail, the ongoing economic recovery from the pandemic that began in Q1 accelerated in the second quarter, resulting in a 38% rise in the retail revenue. This was especially evident in its most well-established medical and healthcare practitioner channels. The management is concentrating on expanding the company's brand presence in both international and domestic markets. We believe the firm is best positioned to benefit from the return to brick and mortar retail since it has the largest market share in the food, pharmacy, mass, and natural specialty retail channels in the United States. Additionally, the company recently planted its first hemp crop in Canada and anticipate initial product sales by early 2022, which is a key positive. On the valuation front, the stock trades at a lower EV to Sales multiple of 2.2x on an NTM basis, versus the industry (Healthcare) median of 6.6x. Hence, considering the aforesaid factors, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 2.59 on September 24, 2021.

Technical Summary

One-Year Technical Price Chart (as on September 24, 2021). Source: REFINITIV, 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.