West Fraser Timber Co. Ltd.

West Fraser Timber Co. Ltd. (TSX: WFG) is a softwood lumber company that is engaged in the production of wood panels and pulp products. The company is active throughout North America, while its lumber mills are located in British Columbia, Alberta, and the Southeastern United States.

Key Updates:

• Diverse Revenue base: The company has a balanced product presence and derives the revenue from lumber and engineered wood product. Moreover, the company’s operation not only limited till North America, but it is also marking its presence across the European and Asian markets as well. A diversified revenue base augurs well for a stable income due to lower dependence on a particular segment.         

Source: Company Report

• Elevated Lumber and OSB prices: During the last few years, the lumber and oriented strand board (OSB) prices remained elevated, supported by strong demand from the US housing segment. The management expect lumber production for FY21 to increase by ~340 MMfbm over 2020 production and anticipated to reach ~6,300 MMfbm. Moreover, demand for OSB is likely to grow in FY21, as it considered as an alternative to plywood in Europe. Additionally, pulp production also expected to improve in FY21.

Source: Company Presentation

• Result update: The company would disclose its first quarter FY21 result on May 07, 2021.

FY20 Financial Highlights:

• WFG announced its full-year result, wherein the company posted its revenue of CAD 5,850 million, higher than CAD 4,877 million in the previous year. The increase was supported by strong momentum from the lumber segment (CAD 3,992 million v/s CAD 2,945 million in FY19) driven by elevated lumber prices.
• The group reported operating earnings of CAD 1,098 million, as compared to an operating loss of CAD 159 million in pcp. The significant improvement was due to higher revenue and lower costs and expenses (CAD 4,752 million v/s CAD 5,036 million in FY19).
• Net Earnings were reported at CAD 776 million, as compared to a net loss of CAD 150 million in FY19.
• The company reported Cash and short-term investments of CAD 587 million, while total assets were recorded at CAD 5,320 million.

FY20 Income Statement Highlights (Source: Company Reports)

Risks: Recent acquisition of Norbord has led to an increase in long-debt for the company from USD 500 million to USD 1,165 million, which might dampen the financial flexibility of the firm.

Valuation Methodology (Illustrative): Price to Earnings based

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

Stock Recommendation:

We expect the US housing segment in FY21 to remain strong, while the company is highly poised to take advantage of the growing demand through its diversified products. Moreover, the company would also focus on sustainable growth through its capital improvement strategy. Further, the acquisition of the Norbord would help the group in leading the market share in the near future. We have valued the stock using P/E based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Canfor Corp, Domtar Corp etc. Considering the above-mentioned facts, we give a ‘Hold’ rating on the stock at the last closing price of CAD 106.42 on April 16, 2021.

One-Year Price Chart (as on April 16, 2021). Source: Refinitiv (Thomson Reuters)

Stella-Jones Inc.

Stella-Jones Inc. (TSX: SJ) produces and sells lumber and wood products. The company sells products in five main customer categories. The railway ties category, which generates the most revenue of any category, sells pressure-treated lumber to the railway industry.

Key Updates:

• Lower dependence on Particular segment: The company derives its majority revenues from utility poles, railway ties, residential lumber and from other segments, which is a key positive as it reduces the dependence on one segment. Notably, the contribution from the residential lumber grew from 10% in FY14 to 26% in FY20.                             

Source: Company Presentation

• Bright FY21 Outlook: For FY21, the company expects its EBITDA within the range of CAD 385 million to CAD 410 million, higher than CAD 385 million recorded in FY20. The company anticipates its sales growth in FY21 would be in the low to mid-single-digit range. SJ expects its railway ties and industrial product sales would be higher than FY20 due to strong demand for residential lumber segment, driven by the rising home improvement projects coupled with higher product pricing.

FY20 Financial Highlights:

• SJ announced its full year result, wherein the company posted Sales of CAD 2,551 million, as compared to CAD 2,189 million in the previous year. The increase was driven by higher sales volume and pricing gain across the company’s three core product categories, coupled with a favourable sales mix for utility poles and railway ties.
• Operating income soared to CAD 309 million from CAD 242 million in FY19, supported by an improved revenue, while the higher cost of sales (CAD 2,105 million v/s CAD 1,831 million in FY19) remained a drag.
• Net income for the period was recorded at CAD 210 million, as compared to CAD 163 million in the previous year.
• The group reported current assets of CAD 1,319 million, while total assets were recorded at CAD 2,426 million.

FY20 Income Statement Highlights (Source: Company Report)

Risks: The company’s operations might be impacted due to lower commodity prices, currency volatility, high raw material costs, etc. 

Valuation Methodology (Illustrative): Price to Earnings based

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

Stock Recommendation:

The company has a strong cash flow, low debt levels and operations in several geographies. Going forward, the company’s operations will be benefitted from growing demand for the utility poles from the 5G networks implementation and “fibre to-home” and sustainable growth within the Residential Lumber segment, supported by higher traction for the US home projects. Over the years, the company maintained a consistent growth in its financials, which indicates business resiliency and prudent operational management.

             Source: Company Presentation

The group has available liquidity of ~CAD 190 million, suficient to support its near term working capital, while does not have a major debt obligation before 2025, which is a key positive.

We have valued the stock using P/E based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like SNC-Lavalin Group Inc, Stantec Inc and TFI International Inc. Considering the above-mentioned facts, we give a ‘Hold’ rating on the stock at the last closing price of CAD 53.03 on April 16, 2021.

One-Year Price Chart (as on April 16, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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