Russel Metals Inc

Russel Metals Inc (TSX: RUS) is a Canada-based metal distribution company which conducts business primarily through three metals distribution segments and has operations across North America. The metal service centers cater to a wide customer base and provide processing and distribution services.

The Company informed that it would disclose its second quarter results on August 06, 2020.

Q1FY20 Financial Highlights: Russel Metals Inc came up with its quarterly results, wherein the company reported revenues of CAD 814.7 million, as compared to CAD 1,032.6 million in the previous corresponding quarter. The decline was majorly attributable to a drastic fall in income from all segments due to the negative impact from ongoing COVID 19 pandemic coupled with the cyclicality of the metals industry and related industries which has hindered the demand prospects. Earnings before interest and income taxes plunged to CAD 19.9 million from CAD 58.2 million in the previous corresponding period (pcp) due to lower-income and higher operating expenses, partially offset by lower cost of materials and decline in employee expenses. The Company reported net earnings for the period at CAD 10.5 million, significantly lower than CAD 34.3 million in pcp. The Company reported cash and cash equivalent of CAD 52.4 million, while total assets stood at CAD 2,010.5 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Company’s performance is linked to the prices of commodities such as steel, oil and gas etc. Any volatility in commodity prices or jolt in commodity demand would impact the group’s performance.

Stock Recommendation: The stock of RUS declined ~21% so far this year, due to a soft demand scenario coupled with volatility in commodity prices. The group’s product is categorized under the essential business. The company is likely to reduce its FY20 capital expenditures due to reduced business activity. We believe the above measure would retain the liquidity within the business.  Furthermore, the company has CAD 50 million for letters of credit and CAD 400 million, which can be utilized for borrowings. This seems to be sufficient to meet the near-term requirements. The management believes that the operating environment is likely to remain challenging in the near term and demand to remain subdued for the group’s offerings. On the valuation front, the stock is trading at a forward EV/EBITDA multiple of 7.6x, which is higher than the industry (basic materials) median of 5.9x. Hence, considering the aforementioned factor, we prefer to remain on sideline and recommend a ‘Watch’ stance on the stock at the closing market price of CAD 17.62 on July 16, 2020.

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

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. 

Q1FY20 Financial Highlights: WEF announced its quarterly results, wherein the Company reported revenue of CAD 99.1 million, declined drastically from CAD 275.7 million. The group recorded significant downfall in lumber and logs shipments due to the negative impact of COVID 19 and strikes by the United Steelworkers. The Company reported a negative adjusted EBITDA of CAD 17.4 million as compared to a profit of CAD 18.1 million in the previous corresponding period (pcp). The quarter was marked by lower cost of goods sold, lower freight expenses and lower selling & administration expense. Loss before income taxes stood at CAD 29.4 million as compared to a profit of CAD 2.7 million in pcp. The Company reported a net loss of CAD 21 million, as compared to a net income of CAD 1.9 million in pcp. The Group reported cash and cash equivalents of CAD 2.2 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: Continuation of the ongoing restrictions would dampen the demand for lumber and logs. Furthermore, any interruption in logistics services would hamper the shipments.

Stock Recommendation: The stock of WEF corrected ~25% so far this year due to demand destruction on account of COVID 19 pandemic. The company reported dismal first-quarter numbers as the business was impacted drastically by the strikes across the US combined with weak demand from construction sectors. The company is pushing its high-margin products in order to improve its profitability. The group reported a substantial rise in demand for industrial Niche products and products combined with stable realization price, which is a key positive. The company also stated that WRC lumber consumption from the Home Centre channel had not been impacted compared to the other distribution channels. Also, demand for Douglas fir and BC coastal Hemlock products has remained steady due to reduced lumber supply from Europe, followed by improved price realization from weak Canadian dollars. The company took a prudent step and suspended its capital expenditure program due to a glitch in demand, which is likely to help in preserving liquidity. However, amidst these positives, we are skeptical about the sustainability of the demand for high margin products. Further, a second wave of the Novel virus could dampen demand further, which would lead to a fall in the overall business performance. On the valuation front, the stock is trading at a forward EV/EBITDA multiple of 7.6x, which is higher than the industry (Paper & Forest Product) median of 7.1x. Thus, considering the aforesaid factors, current price movements, we prefer to remain on the sidelines. Hence, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 0.92 on July 16, 2020.

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

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