Taiga Building Products Ltd

Taiga Building Products Ltd (TSX: TBL) is a Canadian company engaged in the production and wholesale distribution of building products. Its products range includes composite decking, engineered wood, flooring, insulation, lumber, modulings, panels, preserved wood, roofing, etc. It also offers distribution logistics and treating plants services.

Key highlights 

• Robust Q1 2021 performance: The company reported decent performance in the Q1 2021, with revenue surged by 67% to CAD 535.9 million, against CAD 320.2 million on a YoY basis, EBITDA elevated to CAD 45.1 million, up 244% against CAD 13.1 million and net earnings rose by 341% to CAD 29.2 million compared to CAD 6.6 million in the previous corresponding period. The same growth was also witnessed on the sequential basis, on all the parameters, which is appreciable.

• Recovering macros to support the company’s upcoming performance: The majority of the group's operations are around construction and housing activities. Due to decreased borrowing costs, the housing industry in North America has recently seen a recovery, especially in the detached home category. The commodity prices, primarily the building products, has spurred in the recent past, which has resulted in higher realization prices and subsequently driving the company’s cash flow and income, respectively, which is a key positive.
  

• Decline in Total Debt: The company reported a decline in its long-term debt to CAD 7.1 million in Q1 2021, reflecting a fall of ~19% from CAD 8.8 million in Q1 2020. This indicates prudent capital management and is likely to improve the overall financial flexibility of the company. In addition to this, the company also recorded a lower interest expense in Q1FY21, which supported the company bottom line.

 Financial overview of Q1 2021

Source: Company 

• In Q1 2021, the company posted sales of CAD 535.9 million as compared to CAD 320.2 million in the previous corresponding period (pcp). The growth was supported by improved commodity prices for the building material driven by a surge in housing construction.
• Gross margin soared to CAD 90.3 million from CAD 30.5 million in pcp, thanks to elevated revenue, partially offset by higher cost of sales.
• The quarter was marked with significantly higher selling and administration cost at CAD 41.1 million against CAD 13.7 million in pcp. Still, it managed to post healthy earnings before income tax at CAD 40.3 million compared to CAD 7.9 million in pcp.
• Net earnings for the year stood at CAD 29.1 million compared to CAD 6.6 million in pcp.
  

Risks associated with investment

Any decline in building products prices due to lower construction activities would hamper the company’s performance. Furthermore, the company reported significantly higher selling and administrative expenses during the reported quarter, which is a reason for concern and continuation of the above trend could dampen the company’s profitability.

Stock recommendation

The company started its 2021 journey in a grand manner, where its revenue surged by 67% to CAD 535.9 million and net earnings rose by 341% to CAD 29.1 million compared to the previous corresponding quarter. The same trend was seen on the sequential basis, which is appreciable. Furthermore, the healthy housing starts numbers forecasted for 2021, would benefit the company in generating more robust revenues. Additionally, the pandemic has increased demand for detached housing which combined with record high commodity prices and low borrowing rates has had a positive impact on the company’s business. On the valuation front, the stock is available at a TTM price to earnings multiple of 2.8x compared to the industry (Basic Materials) average of 5.6x. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 2.40 on July 26, 2021, with lower double digit (in percentage terms) upside potential.

One-Year Technical Price Chart (as on July 26, 2021). Source: REFINITIV, Analysis by Kalkine Group

Western Forest Products Inc

Western Forest Products Inc (TSX: WEF) is a Canada-based softwood forest products company. Its principal business activities include timber harvesting, reforestation, forest management, sawmilling logs into lumber and wood chips, and value-added lumber remanufacturing.

Key highlights 

• Gaining momentum on sequential basis: Despite the turmoiled period in 2020, the Company maintained its pace and witnessed the spirited performance across its revenue and adjusted EBITDA. The company reached at better numbers because of growing North American lumber demand, which was driven by increased levels of new house building and a robust repair and renovation segment, paired with restricted supply to offer record lumber pricing and enhanced production efficiency.
  

• Higher cash from operating activities: Cash provided by operating activities before changes in non-cash working capital during Q1 2021 stood at CAD 66.3 million compared to cash used of CAD 18.7 million in the same period last year. Unprecedented demand from the North American lumber market drove improved cashflows from operations. In the same period last year, the strike limited the operating cashflow.
  

• Minimizing borrowings: The company has consistently reduced its total borrowing in the last few quarters, which indicates prudent capital management. The company became virtually debt free in Q1 2021 and reported a negligible total debt of CAD 2.5 million, as compared to CAD 71.7 million in Q4FY20.

• Rising Liquidity: The group’s liquidity level has been rising since Q2 2020, where the available liquidity increased from CAD 95 million to CAD 244 million in Q1 2021. The available liquidity seems to be sufficient to meet company’s working capital requirement and other current obligations in 2021.

Financial overview of Q1 2021 (Expressed in millions of CAD)

Source: Company

• The company posted revenue of CAD 322.5 million in Q1 2021, significantly higher than CAD 99.1 million in the previous corresponding period (pcp). The increase was mainly attributed to growth in new home construction coupled with a surge in repair and renovation activities across North America.
• The group reported an operating income of CAD 65 million compared to an operating loss of CAD 27.2 million in Q1 2020. The change was primarily due to higher revenue, partially offset by a higher cost of goods sold, increase in the freight costs coupled with higher selling & administrative expenses.
• Net income stood at CAD 53.8 million, as compared to a net loss of CAD 21.0 million in the previous corresponding period (pcp).

Risks associated with investment

The primary driver of lumber is the construction and remodeling of housing across North America, and hence, a change in building activities would affect the demand for lumber and subsequently drag the lumber prices. Such a trend would result in a lower realization and subsequently impact the income for the company. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The demand for forest products globally, continues to outpace supply driving higher pricing for all of the company’s product segments. Lumber markets in North America are being supported by strong fundamentals including low mortgage rates, a housing deficit stemming from years of underbuilding, and the influence of work-from-home arrangements on the repair and renovation segment. Furthermore, the markets are likely to be further impacted near-term by higher seasonal demand associated with the spring building season. Additionally, the company is really performing well on production and generating healthy numbers, thanks to its improved production efficiency.

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock at the closing price of CAD 1.97 as on July 26, 2021. We have considered Canfor Pulp Products Inc, West Fraser Timber Co Ltd, Interfor Corp, etc. as the peer group for the comparison.

One-Year Price Chart (as on July 26, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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.