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:

• Strong Growth in Cash Flows: The group reported solid growth in cash from operations of CAD 1,295 million, significantly higher than CAD 115 million a year ago. The growth was driven by strong growth in net earnings. Moreover, cash and short-term investments stood at CAD 587 million in FY20, as compared to CAD 16 million in FY20.

• Acquisition of Norbord Inc. to add financial flexibility: On February 01, 2021, WFC closed the acquisition of Norbord Inc., a leading global manufacturer of wood-based panels and the world's largest producer of oriented strand board (OSB). The above acquisition is likely to boost the company’s manufacturing process in the coming years. Moreover, the above would enhance the company’s overall liquidity (including cash and credit facility) to more than USD 2,000 million, with a maturity period not before FY23. 

Liquidity Position (Source: Company Presentation)

• Stable FY21 Guidance: The group expects a stable FY21 performance, wherein SPF Production is expected at 3,300 MMfbm, higher than 3,157 MMfbm, supported by recapture from temporary curtailments and additional productivity. Moreover, the company’s NBSK, BCTMP and SYP productions are expected to remain stable in the FY21. The company is expecting a capital expenditure of CAD 550 million, higher than CAD 241 million in FY20, due to the execution of strategic projects, including USD 185 million for OSB capital.

FY21 Outlook (Source: Company Presentation)

Q4FY20 Financial Highlights:

• WFG announced its quarterly results, wherein the company posted its revenue of CAD 1,689 million, stood higher from CAD 1,129 million in the previous corresponding period (pcp). The increase was supported by strong momentum from the lumber segment (CAD 1,320 million versus CAD 785 million in pcp), backed by higher lumber prices.
• The group reported operating earnings of CAD 515 million, as compared to an operating loss of CAD 31 million in pcp. The improvement was underpinned by higher revenue and slightly higher costs and expenses (CAD 1,174 million versus CAD 1,160 million in Q4FY19).
• Net Earnings were reported at CAD 366 million, as compared to a net loss of CAD 42 million in pcp.
• The company reported total current assets of CAD 1,701 million, while total assets were recorded at CAD 5,320 million.

Q4FY20 Income Statement Highlights (Source: Company Report)

Risks: The acquisition of Norbord has led to an increase in long-debt for the company from USD 500 million to USD 1,165 million, which is likely to increase the finance cost. Moreover, certain input costs like BC Fibre Costs, and Alberta Fibre Costs are expected to remain high in FY21, which could dampen the profitability.

Valuation Methodology (Illustrative): Price to Earnings based

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

Stock Recommendation:

For FY21, the demand for the wood product is likely to remain favorable, while the company is focusing on improving its operational efficiency. Moreover, with the integration of Norbord, the company expects to improve its overall production process, 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 Canfor Corp, Domtar Corp etc. Considering the above-mentioned facts, we give a ‘Hold’ rating on the stock at the current closing price of CAD 82.45 on March 5, 2021.

WFG Daily Technical Chart (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. These categories include railway ties, utility poles, residential lumbers, industrial products and logs & lumber.

Key Highlights:

• Sequentially Improved Performance: Despite a fall in the top-line on Q-o-Q basis, the company reported an improved gross profit and higher operating income in Q3FY20, which is impressive. Gross profit and operating income in Q3FY20 stood at CAD 147 million and CAD 113 million, grew 12.21% and 11.88% from Q2FY20, supported by lower cost of revenue (CAD 595 million versus CAD 637 million in Q2FY20). Notably, net income grew to CAD 79 million, from CAD 69 million in Q2FY20. The group successfully reduced the total debt to CAD 652 million at the end of Q3FY20, which declined ~15% and ~27%, respectively, from Q2FY20 and Q1FY20. 

• Strong Demand within Pressure-treated wood segment: For 9MFY20, the group witnessed a strong momentum within the pressure-treated wood products, which grew roughly ~14% from pcp to CAD 2,018 million, driven by strong demand and improved pricing across all the three core products, primarily within residential lumber, while the logs and lumber revenue were largely driven by robust sales during the third quarter of FY20. The improvement supported the company’s EBITDA growth, which stood at CAD 315 million, reflecting ~24% growth over 9MFY19. Notably, better pricing also resulted in improved EBITDA margin of 15.6% in 9MFY20, against 14.6% a year ago.             

Financial Metrics (Source: Company Report)

Q3FY20 Financial Highlights:

• SJ announced its quarterly result, wherein the company posted Sales of CAD 742 million, as compared to CAD 631 million in the previous corresponding period (pcp). The increase was driven by higher pricing and demand for residential lumber and utility poles.
• Operating income soared to CAD 113 million, significantly higher than CAD 78 million in Q3FY19, supported by an improved sale, while the higher cost of sales (CAD 595 million versus CAD 521 million in Q3FY19) remained a drag.
• Net income for the period was recorded at CAD 79 million, as compared to CAD 54 million in pcp.
• The group reported current assets of CAD 1,364 million, while total assets were recorded at CAD 2,483 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company’s operations might be hindered due to lower lumber 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:

Due to the stable income and cash flows in the recent quarters, the stock of SJ appreciated ~35% in the last one-year, and currently closed near the upper band of its 52-weeks trading range of CAD 49.19 and CAD 23.34, respectively. For FY20, the group expects its EBITDA within the range of CAD 320 million to CAD 345 million, while the company’s capex is expected in the range of CAD 45 million to CAD 55 million. 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 IBI Group Inc, Aecon Group Inc etc. Considering the above-mentioned facts, we give a ‘Hold’ rating on the stock at the current closing price of CAD 48.16 on March 05, 2021.

1-Year Price Chart (as on March 05, 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.