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.

Key highlights:

• Stable Lumber Prices: The group has been benefited from stable Average Lumber Price since FY15. Hence, the company has retained its margins despite economic cycles. Furthermore, product/market diversity and global exposure also supported the margin of the company. Moreover, the cedar product and commodity grades are likely to benefit from U.S. housing recovery and global demand, which is a key positive.                    

Commodity price trend and EBITDA Margin from FY15-Q2FY20 (Source: Company Reports)

• Integrated Product offering to add competitive advantage: The company enjoys flexible manufacturing platform and warehousing and distribution facility to service the US customers in high-value US west coast corridor, which helps the company to access global markets easily. Moreover, cedar, timbers, molding & millwork, and industrial applications are categorized as high-margin products, which provides financial strength and proximity through economies of scale, low-cost access to ocean shipping etc. Demand across the US housing market is likely to remain elevated in the foreseeable future, which is expected to be the biggest contributor to the demand.

Stable Demand Dynamics (Source: Company Reports)

Q3FY20 Financial Highlights

• WEF announced its third-quarter results, wherein the company posted an impressive operating performance, driven by strong momentum from Canada, the United States and China. Revenue grew significantly to CAD 290.6 million from CAD 141.6 million in the previous corresponding period (pcp).
• Operating income stood at CAD 19 million, as compared to an operating loss of CAD 24.2 million in Q3FY19, primarily due to a higher income, while higher costs and expenses remained a drag.
• Net income grew to CAD 11.5 million, as compared to a net loss of CAD 18.7 million, a year ago.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Business might witness setbacks from demand cyclicality, lower realization prices due to several macro factors, which may dampen the company’s profitability. 

Valuation Methodology: EV to EBITDA Based (Illustrative)

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

Stock Recommendation:  The quarter witnessed robust demand from the repair and renovation and new home building segments coupled with improved pricing from the North American lumber markets. Moreover, strong demand across the WRC products resulted in increased shipments also. We expect the above trend is likely to continue in the near term, which would likely to improve the overall sales volume. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered peers like Norbord Inc, Canfor Corp etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 0.87 on November 9, 2020.

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

HLS Therapeutics Inc.

HLS Therapeutics Inc (TSX: HLS) is a specialty pharmaceutical company. It is focused on the acquisition and commercialization of branded pharmaceutical products in the North American markets. The products are related to specialty central nervous system (“CNS”) and cardiovascular (“CV”) markets.

Recent Highlights:

Recently, the company announces that it has acquired through CrownWheel Partners LLC, a wholly owned portfolio company of Longitude Capital, certain entities that hold the rights to a diversified portfolio (the "Portfolio") of royalty interests on global sales of four different products for upfront consideration of at a price consideration of USD 30.8 million cash plus commercial performance milestone payments of up to USD 18.5 million. The portfolio is expected to anticipate sustained and diversified revenues and cash flows in the coming days.

Q3FY20 Financial Highlights:

• HLS announced its quarterly results, wherein the company posted revenue at USD 13.129 million, as compared to USD 13.426 million in the previous corresponding period (pcp). The marginal decline was driven by a reduction in income from the United States.
• The company reported a higher operating loss of USD 1.753 million, as compared to USD 0.749 million, due to a higher cost of sales and a higher Selling and marketing expenses.
• Net loss for the period stood USD 1.733 million, lower than USD 1.998 million in Q3FY19.
• The group ended the quarter with cash and cash equivalent of CAD 20.890 million, while total assets stood at CAD 305.992 million.                  

Q3FY20 Income Statement Highlights (Source: Company Reports)

Key Risks: HLS is exposed to various risk factors, including risks related to the specialty pharmaceutical industry, economic factors, and many other factors beyond the control of HLS. Future growth of the company is highly dependent on the performance of VASCEPA. Any deviation from the forecasted performance may adversely affect the company.

Stock Recommendation:  The company’s leading product Clozaril continues to be the market-leading treatment for treatment-resistant schizophrenia and is witnessing a higher traction in the recent past. During September 2020, the number of Clozaril patients in Canada grew by 2.0% on y-o-y basis, despite a slower patience arrival due to COVID 19 restrictions. Moreover,  HLS is working with leading mental health institutions across Canada to make this new blood testing system broadly available to Clozaril patients. While the deployment of CSAN Pronto has been impacted by the COVID-19 pandemic, the Company continues to expand the number of sites using the CSAN Pronto system, which is a key positive. Canadian Agency for Drugs and Technologies (CADT) recommended Vascepa for treating patients with established cardiovascular disease, which is a key positive. The group announced support for a trial in collaboration with Amarin Corporation to investigate the effects of Vascepa (icosapent ethyl) on inflammatory biomarkers in individuals with COVID-19. The stock of HLS gained ~11% in the last one month and outperformed the benchmark index by ~11.5%. Furthermore, the stock closed above its 20-days, 30-days and 50-days simple moving average (SMA), indicating a bullish trend. Hence, considering the aforesaid facts, current trading levels, price movement, we recommend ‘Speculative Buy’ rating on the stock at the current closing price of CAD 15.56 on November 9, 2020.

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

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.