Stella-Jones Inc.

Stella-Jones Inc. (TSX: SJ) is a Canada-based company, which is a leading producer and marketer of pressure-treated wood products. The business supplies North America’s railroad operators with timbers and railway ties, and electrical utilities and telecommunication businesses with utility poles.

Guidance: Stella-Jones expects its FY20 EBITDA within the range of CAD 300 million to CAD 325 million with a decline in margin over FY19 and estimates a stable demand from the utility pole, railway tie and industrial segments.

Q1FY20 Financial Highlights: SJ impresses with its first quarter results and reported a 14% y-o-y growth in revenue to CAD 503 million due to growth within the pressure-treated wood products. The growth was driven by a decent demand from utility poles and residential lumber segments, couple with improved pricing for utility poles and railway ties. Gross profit stood at CAD 83 million, as compared to CAD 70 million in the previous corresponding period, thanks to the higher sales. EBITDA remained flat at CAD 63 million against CAD 64 million in pcp and included a CAD 7 million mark-to-market loss for diesel derivative commodity contracts. The Company reported net income of CAD 28 million, as compared to CAD 29 million in Q1FY19.

Q1FY20 Financial Snapshot (Source: Company Reports)

Valuation Methodology: P/E Based Relative Valuation (Illustrative)

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

Stock Recommendation: The Stock of SJ corrected ~8% so far this year and outperformed the benchmark index by~3%. The Company reported a decent performance in Q1FY20 amid challenging market conditions, which is impressive. The demand of the frontline segments was exceptionally well, and we believe, the company would continue to report improved income within the utility pole, railway tie and residential lumber segments. However, due to the challenging economic environment, the company expects a slight decrease in its FY20 EBITDA. The Company mentioned that it has ample liquidity and strong balance sheet. The group’s offerings are considered critical to the integrity of the supply chains for North American utilities, railroads and the construction industry. Further, easing of lockdown restrictions across the states is likely to support the demand for residential lumber. On the basis of technical parameters, the stock has closed above the 75-days and 100-days simple moving average of CAD 32.3 and CAD 33.63, respectively, indicating a bullish trend. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Stantec Inc (TSX: STN), TFI International Inc (TSX: TFII), Aecon Group Inc (TSX: ARE) and so on. Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 34.32 on June 15, 2020. 

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

Norbord Inc.

Norbord Inc. (TSX: OSB) is a leading global manufacturer of wood-based panels and is a leading producer of oriented strand board (OSB). The Company also manufactures particleboard, medium-density fibreboard and related value-added products. The Group has 17 facilities across the United States, Canada and Europe.

Recently, the Group has increased its revolving bank facility by CAD 55 million to CAD 300 million, and the maturity date has been extended to May 2022 in order to support its near-term capital requirements.

The Group declared a quarterly dividend of CAD 0.05 per common share, payable on June 22, 2020.

Q1FY20 Financial Highlights: OSB reported its quarterly results, wherein the Company reported total sales of USD 467 million, as compared to USD 476 million in the previous corresponding period. The marginal fall was primarily attributed to a 17% y-o-y lower income from European segment, while partially offset by a 9% sales growth from North America. The North American markets were driven by the construction of new homes across the US. Operating income grew significantly to USD 40 million, as compared to USD 6 million in Q1FY20. The quarter witnessed a lower cost of sales while general & administrative expense and depreciation & amortization expense stood at par with Q1FY19. Net earnings were reported at USD 20 million, considerably higher than USD 1 million in pcp, thanks to the higher operating income. The Group exited the quarter with cash and cash equivalent of USD 30 million, while total assets stood at USD 1,904 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 corrected ~23% so far this year following a correction across the market. The Business has been categorized under the essential services across all the Geographies it operates and not experienced any significant raw material or other supply disruptions. However, the company witnessed a moderation in demand from the home building and repair-and-remodeling sectors. Within the industrial segment, the operations of the group's customers were halted in March, but they have started operation lately. During the month of April, the capacity of the North American and European operating facilities stood at around 35%. The group mentioned that a number of its markets, in particular Germany and North American repair-and-remodeling, have been more resilient than expected to-date. The group is focusing on cost management and liquidity preservation. The company has decent liquidity of ~USD 300 million, which seems enough to help the group in navigating the current challenging environment. Further, the demand for the group's product is likely to recover following easing in lockdown restrictions which is likely to drive the construction activities. The Stock closed above the 50-days and 75-days simple moving average (SMA) of CAD 22.66 and CAD 23.18, respectively, indicating a medium-term bullish trend. The Stock surged ~16% in the last one months, outperforming the index by ~9%. We have valued the Stock using EV/Sales based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). For the said purpose, we have considered Mercer International Inc, Acadian Timber Corp and West Fraser Timber Co Ltd etc. as a peer group. Hence, we recommend a 'Buy' rating on the stock at the closing market price of CAD 27.38 as on June 15, 2020.

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

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