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.

Key Highlights:

• Stable Dividend Payment despite ongoing economic jolt: For the three-month ended March 27, 2021, the company maintained its dividend payment at CAD 4.839 million at a time when most of the companies are slashing their dividend distribution in order to retain liquidity. This reflects a stable cash generation from the group’s operations. Notably, the corporation has an impressive dividend payment history, which tilts in favor of the company’s shareholders. Moreover, at the last traded price, the stock was offering a dividend yield of ~6%, which is lucrative considering the current interest rate scenario.               

Five Years Dividend History, Source: Refinitiv (Thomson Reuters)

• Stable Industry Scenario: The management expects that its near-term operations are likely to remain stable despite a sluggish economic scenario. Demand for softwood and hardwood sawlogs are likely to remain positive, while hardwood pulpwood and biomass would witness demand revival. Moreover, the persisting low-interest rate scenario is likely to support home construction activities across North America, which would drive the softwood sawlogs segment due to strong construction, and repair & remodelling activities. This is expected to result in strong demand and pricing for the hardwood sawlogs. Additionally, the hardwood pulpwood demand is expected to be supported by stable demand from mills.

• Better than Industry Margin: The company reported an improved margin profile as compared to the industry median, which states that the company is performing better than the industry. In Q1FY21, EBITDA margin and operating margin stood at 26.3% and 26%, respectively, higher than the industry median of 19% and 12.8%, respectively. Moreover, the company reported its net margin at 22.5% in Q1FY21, considerably higher than the industry median of 8.2%.

Source: Refinitiv (Thomson Reuters)

Q1FY21 Financial Highlights:

• ADN announced its quarterly result, wherein the company posted sales at CAD 25.892 million, lower than CAD 31.408 million in the previous corresponding period (pcp). During the quarter, the company reported a lower sales volume of 290,000 metric tonnes, v/s 374,900 metric tonnes in pcp.
• Operating earnings stood at CAD 6.740 million, lower than CAD 8.263 million in Q1FY20. The decline was due to a lower income, partially offset by a lower cost of sales (CAD 17.447 million v/s CAD 20.861 million in pcp) and lower selling, administration and other costs (CAD 1.640 million v/s CAD 2.217 million in pcp).
• The company reported a decline in the net finance expense at CAD 0.755 million from CAD 1.291 million in pcp.
• Net earnings stood higher at CAD 5.824 million, as compared to a net loss of CAD 3.711 million in pcp, due to an unrealized gain of CAD 1.216 million v/s a net loss of CAD 8.210 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Reports)

Risks: Due to the ongoing restrictions, the economy might witness several setbacks, which may lead to lower demand for the company’s product due to a lower capital allocation by the end-users. Moreover, a lockdown in mills would lead to lower demand from the industrial segment.

Stock Recommendation:

Despite a tepid economic scenario, the company maintained its adjusted EBITDA margin at 27% in Q1FY21, supported by lower administrative costs, which is a key positive. On the flip side, road closures due to soft road conditions on account of mild weather would reduce access to woodlands and would lead to lower trucking availability. This may deteriorate the company’s overall performance. The management expects demand to revive as home constructions activities are likely to increase. Moreover, the stock is offering a lucrative dividend yield amid a low interest rate environment. On the valuation front, the stock is available at a forward price to cash flow multiple of 2.0x, which is significantly lower compared to the industry (Paper & Forest Products) median of 4.9x. Based on technical analysis, the stock has support at CAD 16.0 level. Considering the above rationale, we give a ‘Speculative Buy’ rating on the stock of ADN at the last closing price of CAD 19.30 on May 11, 2021.

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

1-Year Price Chart (as on May 11, 2021). Source: Refinitiv (Thomson Reuters)

Gamehost Inc.

Gamehost Inc. (TSX: GH) is operating in hospitality and gaming properties in Alberta, Canada. The company operates services like casinos offering slot, VLT, lottery and table games; the Hotel segment includes hotels catering to mid-range clients etc.

Key Updates:

• Industry Beating Margin-profile: Due to the persisting restrictions and lower footfalls, the casino industry is battling with shrinking profitability, increasing debt and sluggish cash flows, resulting in a decline in margins. However, GH has maintained a stable margin profile, which is better than the industry median, through disciplinary capital management. Notably, the company’s EBITDA margin and operating margin at the end of FY20 stood at 40.20% and 28.30%, respectively, higher than the industry median of 10.30% and 3.30%, respectively. Moreover, the company reported a net margin of 16.50%, as compared to the industry median of -7.5%.                     

Source: Refinitiv (Thomson Reuters)

• Manageable Debt-profile amidst industry slowdown: In the recent past, the company reported a slight increase in the total debt at CAD 51.6 million at the end of Q4FY20, v/s CAD 48.7 million in Q3FY20. The Debt/Equity ratio stood at 0.49 which seems manageable, given the strong margin profile.

FY20 Financial Highlights:

• GH announced its full-year result, wherein the company reported operating revenue of CAD 34.6 million, v/s CAD 68.0 million in the previous financial year. The decrease was mainly attributable to the voluntary closure of casinos due to the restrictions imposed on account of the COVID-19 pandemic.
• Gross profit stood at CAD 9.1 million, considerably lower than CAD 26.2 million in the previous year, due to lower revenue, partially offset by a decline in cost of sales (CAD 25.5 million v/s CAD 41.8 million in FY19).
• The company reported profit before income tax of CAD 7.5 million, slide from CAD 20.3 million in the previous financial year. The period was marked by lower administrative expense (CAD 2.3 million, v/s CAD 2.9 million in FY19) and a lower net finance cost (CAD 1.5 million v/s CAD 2.1 million in FY19).
• The group’s bottom-line ended in green at CAD 5.7 million, down 65.6% from FY19.
• GH reported a cash balance of CAD 10.3 million, while total assets were recorded at CAD 175 million.

FY20 Income Statement Highlights (Source: Company Report)

Risks: Continuation of the restrictive measures would lead to several setbacks, such as shrink in profitability, which might lead to liquidity risk due to excess financial obligations. 

Valuation Methodology (Illustrative): Price to Earnings based

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

Stock Recommendation:

In order to retain liquidity, the management suspended its dividend payment, while senior management deferred their remuneration (100%) till further notice. Meanwhile, the group has liquidity of CAD 13.8 million and a revolving debt facility which seems to be sufficient to sail through the current pandemic. Going forward, we expect the restriction to ease as the vaccine rollout is in full swing. Less restrictions would result in higher demand for the group’s offerings. We have valued the stock using the Price to Earnings-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Monarch Casino & Resort Inc, Century Casinos Inc etc. Based on technical analysis, the stock has a support at CAD 5.6 level. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the last closing price of CAD 6.95 on May 11, 2021.

*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 May 11, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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