Canfor Corporation

Canfor Corporation (TSX: CFP) is a leading Canada based integrated forest products company, which produces softwood lumber. Canfor has a majority stake in Canfor Pulp Products Inc., producer of Softwood Kraft Pulp and a premium kraft paper.

Q1FY20 Financial Highlights: For the period ended March 31, 2020, CFP reported its quarterly number wherein it posted sales of CAD 1,170.7 million, mildly higher than CAD 1,148.7 million in the previous corresponding period. The increase was supported by improved performance from both the segments. Total costs and expenses increased to CAD 1,259.5 million, against CAD 1,213 million in pcp due to higher manufacturing & product costs, and elevated countervailing and anti-dumping duty expense, followed by a significantly higher amortization cost, which was partly offset by a decline in freight and other distribution costs and a lower selling and administration costs. The Group’s operating loss came in at CAD 88.8 million, higher than the loss of CAD 64.3 million in pcp. Net loss during the first quarter of FY20 trimmed to CAD 65.2 million, as compared to CAD 79 million in Q1FY20. The improvement was majorly driven by another income along with a gain on derivative financial instruments, while higher finance expense, an increase in foreign exchange loss remained as a drag. The Company exited the quarter with cash and cash equivalent of CAD 116.5 million and total assets of CAD 4,691 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock price of CFP has reported a decline of 32% in the last six months. The Company has two product-line, lumber and pulp & paper. The demand for pulp & paper segment is estimated to be on the higher side, amidst near term hiccups in certain regions. Due to the temporary closure of non-essential businesses coupled with lower construction activities, the demand for lumber took a hit. We expect a gradual revival in demand, as several Governments are easing the existing lockdown. The stock started gaining traction in the last one month and witnessed an increase in investor’s interest. As a result, the stock generated a return of ~19% in last one month outperforming the index by ~13%. We believe, most of the negatives have been factored in at the current trading levels. The stock is trading above its 20-days and 50-days simple moving average (SMA) of CAD 9.7 and CAD 8.56, respectively, which indicates a short-term bullish trend. We have valued the stock using EV/Sales based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have considered West Fraser Timber Co Ltd (TSX: WFT), Domtar Corp (TSX: UFS) and Norbord Inc (TSX: OSB) etc. as a peer group. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 11.95 on June 2, 2020.

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

Westshore Terminals Investment Corp

Westshore Terminals Investment Corp (TSX: WTE) is a Canada Based Company engaged in industrial transportation; operating loads terminal and coal storage in British Columbia based Roberts Bank. The group handles coal from mines in Alberta, British Columbia, and north-west part of the US.

The group is not expecting any material change in the estimated throughput volumes for FY20 owing to COVID-19 Pandemic.

Q1FY20 Financial Highlights: WTE impresses with its decent set of quarterly number, wherein the company reported revenue of CAD 92.37 million, as compared to CAD 88.80 million in the previous corresponding period. The improvement was driven by higher coal loading revenue and improved other revenue. Volumes during the quarter increased 11.7% on y-o-y, while the average loading rate stood lower at CAD11.65 per tonne against CAD 12.58 per tonne in Q1FY19. The period was marked by stable operating costs, while administrative costs decline considerably. Profit for the period stood at CAD 29.07 million, as compared to CAD 27.23 million in the previous corresponding quarter, primarily attributed to a lower finance costs, while foreign exchange loss and a higher income tax remained a drag. The group exited the quarter with cash and cash equivalent of CAD 126.85 million, while total assets stood at CAD 1,193.63 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price to CF Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock corrected ~19%, so far this year amid a stiff correction across the broader market. The revenue of the Company is co-related to the total shipment and contracted value per unit coupled with the input costs related with the operations. The Company secures its revenue by taking fixed shipment order from the customers and at a fixed price. The service provided by the Company comes under essential and is immune to the market cycle. We expect, the demand to improve in coming quarters aided by improved manufacturing and industrial activities. The Corporation is well-positioned to handle a range of bulk commodities apart from coal, which offers diversification to the business. The group also mentioned that it has not witnessed any impact on its business amid COVID-19 pandemic. The stock gained ~8% in the last one month and is trading above its 20 days and 50 days simple moving average of CAD 14.78 and CAD 14.22, respectively. We have valued the stock using Price/CF based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered the industry median (Transports & Infrastructure). Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 15.28 on June 02, 2020.   

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

Disclaimer

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