Western Forest Products Inc

Western Forest Products Inc (TSX: WEF) is a Canada-based softwood forest products company. The company's principal business activities include timber harvesting, reforestation, forest management, sawmilling logs into lumber and wood chips, and value-added lumber remanufacturing. Its operating business segment comprised of Timber harvesting, Log sales, and Lumber manufacturing and sales. 

Q2FY20 Financial Highlights: WEF announced its quarterly results, wherein the company posted revenue of CAD 256 million as compared to CAD 310 million in the previous corresponding period (pcp). The decline was due to a 28% lower shipment of 152 million board feet due to a persisting weak demand scenario within the lumber market. The group recorded a 12% increase in the average realized lumber price over the same period last year, despite a significant uncertainty in key export markets from COVID-19.  The company reported a 4% dip in revenue from the log segment. In the log segment, shipment increased while average price realizations declined due to a weaker sales mix. Log sales mix was negatively impacted by inventory degradation, which occurred due to the Strike in certain British Columbia operations. Adjusted EBITDA stood at CAD 29.5 million as compared to CAD 15.1 million in pcp. The company reported a higher adjusted EBITDA margin of 12%, as compared to 5% in pcp. The improvement in the EBITDA and EBITDA margin was due to lower employment costs supported by the Canadian Emergency Wage Subsidy program. The company reported a net profit of CAD 8.5 million, as compared to a net loss of CAD 0.7 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The income of the company is directly related to the realization price and total shipment. Continuation of the ongoing restrictions would dampen the demand for lumber and logs. Furthermore, any interruption in logistics services would hamper the shipments.

Valuation Methodology: EV to Sales Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendations: The stock of WEF gained ~35% and ~12% in the last three months and six -months, respectively. The company reported assistance from the Canadian Emergency Wage program, which is key support and has lifted the margin of the group. The company witnessed a demand recovery since June 2020 and is expected to be benefited from the gradual reopening of several markets, which is a key positive and augurs well for improved realization price. Demand for Niche lumber products, used for the treating segment in North America has remained strong, and the management expects an improvement in the price realization in the third quarter of FY20, which would support the company’s cash flow. COVID-19 related operating curtailments in Europe and New Zealand impacted log supply to China in the first half of this year. The group expect European and New Zealand log supply to return to pre-pandemic levels leading to a more competitive price environment. In the domestic log market, the group expect moderate price improvements supported by increased demand from local manufacturers. We have valued the stock using EV to Sales based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered Canfor Pulp Products Inc, Interfor Corp and Norbord Inc etc. as a peer group.  Considering the aforesaid facts, and current price movement, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 1.11 on September 10, 2020.

WEF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

EXFO Inc.

EXFO Inc (TSX: EXF) develops smarter test, monitoring and analytics solutions for fixed and mobile network operators, webscale companies and equipment manufacturers in the global communications industry. The group is headquartered in Quebec, Canada. The group offers communications service providers (CSPs) and data center, cloud and Web-scale operators with the field test, service assurance and analytics solutions to ensure the deployment, maintenance, and management of physical, virtual, fixed and mobile networks.

Key Highlights:

• EXFO Inc announced the acquisition of InOpticals Inc., a Taiwan based technology leader which offers ultra-high-speed test instruments for the laboratory and manufacturing markets. Furthermore, InOpticals Inc. product-line addresses 400G/800G high-growth sectors like silicon photonics-based transceivers, active and passive components, and we believe the above acquisition would strengthen EXF's product portfolio.
• The company recently announced that it had secured service assurance contracts with five new customers amounting to ~USD 5 million, including a previously announced agreement with eir in Ireland.

Q3FY20 Financial Highlights: EXFO Inc announced its third-quarter results, wherein the company posted sales of USD 66.147 million as compared to USD 73.587 million in the previous corresponding period (pcp). The decline was majorly due to sales decline in both test and measurement and service assurance, system and services segments. The quarter was marked by lower cost of sales, a decline in the selling and administrative expense and amortization of intangible assets. The group's earnings before income tax stood at USD 5.868 million, significantly higher than the USD 3.406 million in the previous corresponding quarter. Net earnings during the period stood at USD 3.177 million, as compared to USD 0.021 million in Q3FY19. Adjusted EBITDA stood relatively higher at USD 10.656 million, as compared to USD 7.86 million, a year ago.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Extended lockdown restrictions may affect the shipment of the company’s products and logistics. Furthermore, as several companies are postponing their capital investments, the company’s bookings might see a near-term setback.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Amidst a recent jolt in the economy along with a correction in the financial markets, the stock of EXF has appreciated ~16% and ~11% in the last three months and six months, respectively. The Management estimates an adjusted EBITDA of USD 33 million for FY20 and is targeting an adjusted EBITDA margin of 15% till FY21. In the third quarter of FY20, the company made strong progress in China for its advanced equipment for labs and network equipment manufacturers (NEMs), mainly for 5G deployments, as China was the first region to re-open after the lock-down, and received large orders for copper test solutions in the EMEA region. EXFO develops smarter test, monitoring and analytics solutions in the global communications industry. Since most of the countries have started easing the restrictions and 5G deployment is likely to go on, we expect the demand for the group’s offerings to increase. We have valued the stock using P/CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Industrials) median on NTM basis. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating in the stock at the current market price of CAD 4.71 on September 10, 2020.

EXF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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