Stella-Jones Inc.

Improved Financial Strength and Reduced Leverage: Stella-Jones Inc. (TSX: SJ) produces and sells lumber and wood products. As on 6 August 2020, the market capitalization of the company stood at ~CAD 2.91 billion.

Quarterly Performance (For the Period Ended 30 June 2020): The company delivered improved results for the second quarter and realized double-digit sales growth of 15% to CAD 768 million and increased EBITDA by 28% to CAD 120 million. During the quarter, it generated CAD 146 million of cash from operations and announced its intention to repurchase up to 3,000,000 of the outstanding shares. In the same time span, the company further improved its financial strength and flexibility and reduced its leverage. As at June 30, 2020, the Company’s long-term debt stood at CAD 636 million and the net debt to trailing 12-month EBITDA decreased to 1.9x. As a result of the continued strength of the Company’s balance sheet and resiliency of its business model, the Board of Directors declared a quarterly dividend of CAD 0.15 per share, which is to be paid on 18 September 2020.

Quarterly Financial Highlights (Source: Company Reports)

Outlook: The company has increased its EBITDA guidance by CAD 20 million and expects it to be between CAD 320 million to CAD 345 million for FY20. The Company also intends to target a net debt-to-EBITDA ratio of between 2.0x and 2.5x. This will allow the Company to return capital to shareholders and take advantage of growth opportunities to further strengthen its position.

Key Risks: The company is susceptible to a variety of risks including general economic and business conditions, including the impact of the outbreak of the coronavirus pandemic, evolution in customer demand, product selling prices, availability and cost of raw materials, changes in foreign currency rates, and the ability to raise capital.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The company seems to be well placed to benefit from the growth opportunities to further strengthen its position in its core product categories, both organically and through acquisitions, and enhance shareholders’ value. As per TSX, the stock of SJ is trading close to its 52-week high level but retains potential for further growth. The stock of SJ gave a return of 26.59% in the past three months and a return of 20.51% in the last one month. We have valued the stock using the EV/Sales multiple based illustrative relative valuation and have arrived at a target upside of high single-digit (in percentage terms). Considering the current trading levels, decent returns in the past three months, positive outlook, and improvement in financial performance, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 43.18, down by 0.1619% on 6 August 2020.

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

Franco-Nevada Corp

Franco-Nevada Corp (TSX: FNV) is a stream and royalty Company with a focus on gold. The Group owns a portfolio of working interests, stream and royalty, covering properties at Africa, Australia, Canada, United States and Latin America. In Canada, the properties include Brucejack, Canadian Malartic, Hemlo, Golden Highway, Detour Lake and Sudbury.

Financial Highlights – Q2 and H1 Financial Year 2020 (30 June 2020, USD, million)

(Source: Quarterly Report, Company Website) 

In the first half of the financial year 2020, driven by an increase in gold, silver and PGM’s for the period, the revenue in H1 FY2020 stood at USD 435.9 million (H1 FY2019: USD 350.3 million), while the revenue in Q2 FY2020 increased to USD 195.4 million (Q2 FY2020: USD 170.5 million). The gross profit stood at USD 247.6 million in H1 FY2020 (H1 FY2019: USD 170.7 million), and gross profit in Q2 FY2020 stood at USD 115.1 million (Q2 FY2019: USD 84.2 million). The Group reported an operating loss of USD 37.8 million in H1 FY2020 (H1 FY2019: operating income of USD 159 million), while the Company reported an operating income of USD 105.7 million in Q2 FY2020 (Q2 FY2019: USD 79 million). In H1 FY2020, the Company reported a net loss of USD 4.4 million (H1 FY2019: net income of 129.2 million), while the Company reported net income of USD 94.4 million in Q2 FY2020 (Q2 FY2019: USD 64 million). The basic and diluted loss per share stood at $0.02 in H1 FY2020 (H1 FY2019: basic and diluted earnings per share of $0.69). The cash balance as on 30 June 2020 stood at USD 378.5 million (31 December 2019: USD 132.1 million).

Share Price Performance

FNV 1 Year technical chart, Source: Refinitiv, Thomson Reuters

Franco-Nevada Corp shares closed at CAD 207.78 at the time of writing after the market close on 6 August 2020. Stock 52 week High and Low were CAD 222.15 and CAD 105.93, respectively.

Key Risks

The Group’s performance is impacted by any hazards related to mining and development on properties in which it holds interest, stream and royalty. The business is also impacted by unexpected metallurgical and geological conditions, flooding, slope failures and other natural disasters. The Company may fail to integrate the acquired assets, which may lead to integration risk.

Conclusion

In H1 FY2020, the top-line performance has improved, while bottom-line performance declined and remained in the negative zone for the period. The liquidity position has increased for the period, with the well-positioned balance sheet. The recent increase in the gold prices in the global markets will improve financial performance and bring operational stability. The Group expects attributable sales from royalty and stream to be in between 475,000 GEOs to 505,000 GEOs from mining assets in FY2020. The Company expects revenue from energy assets to be in between $60 million to $75 million in FY2020.

Based on the above rationale, we have given a “Hold” recommendation at the closing price of CAD 207.78 (as on 6 August 2020).

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.