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 Highlights:

• Elevated lumber prices remained as the key performance driver: In the recent past, North American lumber prices have remained in the uptrend, driven by the strong momentum from residential construction, repair and remodelling, and industrial applications across the region. Notably, lower mortgage rates coupled with the construction deficit of housing due to several years of underbuilding has remained as the prime drivers for the construction activities. As per the estimates, U.S. housing is likely to touch 1.5 million units in 2021, depicting a surge of 9% over 2020. We believe the company is highly poised to benefit from the additional demand arising from the sector.

Source: Company Presentation

• Ample liquidity with no near-term maturity: The corporation reported a strong liquidity profile at the end of Q1FY21 at USD 2,551 million, up from USD 1,272 million in Q4FY20, supported by robust cash flow generation, which is a key positive. With the current liquidity, the company would be able to meet its working capital requirements, undertake strategic capital investments, and repay debt. Moreover, the group does not have any immediate maturity till mid-2023, which augurs well for the retention of liquidity.

Source: Company Presentation

Q1FY21 Financial Highlights:

• WFG announced its quarterly-year result, wherein the company posted revenue of USD 2,343 million, higher than USD 890 million in the previous corresponding period (pcp). The increase was supported by strong momentum from the lumber segment (USD 1,198 million v/s USD 547 million in Q1FY20).

Revenue Bifurcation (Source: Company Report)

• The group reported operating earnings of USD 879 million as compared to USD 9 million in pcp. The significant improvement was due to higher revenue, which was partially offset by higher costs and expenses (USD 1,464 million v/s USD 881 million in Q1FY20).
• Net Earnings were reported at USD 665 million, surged from USD 9 million in Q1FY20.
• The company reported cash and short-term investments of USD 1,400 million, while total assets were recorded at USD 9,973 million.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The majority of the company’s revenue derived from the lumber segment, and a correction in the lumber prices would lead to lower realization, which may hinder the company’s cash flows and margins.

Valuation Methodology (Illustrative): Price to Earnings based

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

Stock Recommendation:

WFG has a diverse wood products portfolio, and with the recent inclusion of Norbord, the entity commands the tag of the leading global producer of oriented strand board (OSB). The company has a strong balance sheet with a manageable debt profile. Moreover, the company has identified several cost-saving opportunities within the fibre supply chain segment, while it remained focused to achieve a targeted annual synergy of USD 61 million during the next 18-24 months. Additionally, the demand for the company’s products across the European geography is expected to be robust, supported by change in consumer preference of choosing OSB as an alternative to plywood. 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, Cascades Inc etc. Considering the above-mentioned facts, we give a ‘Hold’ rating on the stock of WFG at the last closing price of CAD 95.16 on May 14, 2021.

One-Year Price Chart (as on May 14, 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, which includes: utility poles, railway ties, residential lumber, industrial products, and logs & lumber.

Key Highlights:

• Elevated Financials: Over the years, the company’s income and profitability have remained on an uptrend, supported by a strong business model. Sales and net income grew to CAD 2,551 million and CAD 210 million, respectively, in FY20 from CAD 640 million and CAD 56 million, respectively, in FY11. The company also recorded its Net debt to EBITDA at 1.9x at the end of FY20, which has been in a downtrend since FY12. A declining Net Debt to EBITDA indicates improved financial flexibility. 

Source: Company Presentation

• Impressive Guidance: For FY21, the company reised its EBITDA guidance to CAD 450 million to CAD 480 million range from the earlier guidance of CAD 385 million to CAD 410 million. Moreover, the company expects FY21 organic sales growth in the mid-single digit range over FY20. The management further expects its operations to be benefitted from higher demand from the pole replacement segment coupled with increased traction from the fire-resistant wrapped pole volumes.

• Stable Dividend Payout: The company has distributed consistent dividend to its shareholders and has increased its distributions backed by growing cash flows, which is a key positive. Notably, from FY12 to FY21E, the group has reported an 18.2% CAGR in its dividend distribution, which is encouraging.

Dividend History (Source: Company Presentation)

Q1FY21 Financial Highlights:

• SJ announced its quarterly result, wherein the company posted Sales of CAD 623 million as compared to CAD 508 million in the previous corresponding period. The increase was driven by improved sales from pressure-treated wood products, aided by the combination of elevated lumber prices coupled with strong demand for residential lumber products.
• Operating income surged to CAD 82 million from CAD 45 million in pcp, supported by an improved revenue, while the higher cost of sales (CAD 511 million v/s CAD 425 million in pcp) remained a a drag.
• Net income for the period was recorded at CAD 56 million, significantly higher than CAD 28 million in the previous year.
• The group reported current assets of CAD 1,576 million, while total assets were recorded at CAD 2,675 million.

Q1FY21 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 

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

In FY21, the group would be focusing on improving operational efficiency, innovating its products portfolio in order to offer a better value proposition to customers, which would further lead to increase demand for the company’s products. The group is witnessing strong demand from the residential lumber product category and hence is looking for capacity expansion. 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 West Fraser Timber Co Ltd, SNC-Lavalin Group Inc. Considering the above-mentioned facts, we give a ‘Hold’ rating on the stock at the last closing price of CAD 49.55 on May 14, 2021.

One-Year Price Chart (as on May 14, 2021). 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.