Western Forest Products Inc.

Western Forest Products Inc. (TSX: WEF) is a Canada-based softwood forest products company. The company's principal business activities include timber harvesting, reforestation, forest management, sawmilling logs into lumber and wood chips, and value-added lumber remanufacturing. Its operating business segment comprised of Timber harvesting, Log sales, and Lumber manufacturing and sales. 

Key Updates:

• Favorable macros indicate resilient demand: Wood products are used for housing construction both for interior and exterior living due to its renewable characteristics, recyclable and eco-friendly nature. Wood also has the upper hand over steel products as it requires less energy to produce. Hence, consumers prefer wood in buildings as it would drive climate change benefits, which is a key positive and is expected to support the lumber prices in the coming days.

• Cash flow turns positive: In H1FY21, the company reported its cash from operations of CAD 159.0 million, as compared to a cash outflow of CAD 18.6 million in pcp. The improvement was supported by a solid net profit as compared to a net loss coupled with improved working capital management. A positive cash flow would support the company’s liquidity.

• Higher profitability margins: The company reported improved cost structure in the recent past and has resulted in higher profitability margins. Notably, in Q2FY21, EBITDA margin and operating margin were recorded at 29.1% and 25.7%, higher than the industry median of 20.4% and 15.4%, respectively. Moreover, the net margin was recorded at 18.9% in Q2FY21, higher than the industry median of 9%.

Q2FY21 Financial Highlights:

• WEF announced its quarterly results, wherein the company posted its revenue of CAD 414.4 million, jumped from CAD 256.3 million in pcp. The growth was supported by higher lumber revenue supported by strong demand from the new home construction and from the repair and renovation segments which has outpaced supply resulting in favorable lumber prices. Average realized price stood at CAD 1,598 per thousand board feet, reflecting an increase of 29% on y-o-y basis.
• Adjusted EBITDA soared to CAD 120.4 million, from CAD 29.5 million in pcp. Adjusted EBITDA margin rose to 29%, from 12% on pcp. Total cost surged to CAD 308.7 million, as compared to CAD 241.7 million in pcp, due to a corresponding increase in all input costs.
  

• Net income stood at CAD 78.3 million, higher than CAD 8.5 million in pcp, supported by lower finance costs, partially offset by higher income tax expense.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risk: The primary driver of lumber is the construction demand and remodelling of housing across North America, and hence, a change in building activities would likely dampen the demand for lumber and subsequently drag the lumber prices. 

Valuation Methodology (Illustrative): Price to Earnings based

Stock Recommendation:

The company is focusing on the production and sale of specific, high-margin products  for customers in order to improve the company’s margin. Moreover, in the recent past, demand and pricing for the Cedar and Niche products have improved in all product categories due to robust demand for residential repair and renovation products. The management also believes that the above momentum to sustain in the coming days, supported by the supply constraints scenario. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like KP Tissue Inc, Canfor Pulp Products Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of WEF at the last traded price of CAD 2.38 on October 14, 2021.

One-Year Technical Price Chart (as on October 14, 2021). Analysis by Kalkine Group

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

Copper Mountain Mining Corporation

Copper Mountain Mining Corporation (TSX: CMMC) is engaged in the production and exploration of copper and operates with its flagship project, namely Copper Mountain's mine located in southern British Columbia near the town of Princeton.

Key Updates:

• Commissioning of the Ball Mill 3 project: The company recently reported that it has successfully mounted and started commissioning the third ball mill in the Copper Mountain Mine, located in southern British Columbia, Canada.  The above would result to the installation in the third ball mill and would expand milling capacity to 45,000 tonnes per day from its existing 40,000 tonnes per day.
• Impressive drilling results: Recently, the group reported positive results from its 18 drill holes, totalling 6,924 metres, drilled at the New Ingerbelle copper-gold open pit as part of ongoing exploration activity.  The above drill program reported long intercepts of high-grade mineralization with continuity, doubling the vertical extent of mineralization below the existing pit. Additionally, the group is focusing on adding two more drill rigs in order to strengthen its existing operation in the above mine.
• Industry beating margin profile: The company reported higher profitability margins, as compared to the industry median, which indicated higher operational efficiencies and improved cost structure. EBITDA margin and operating margin stood at 60% and 54.2%, respectively, in Q2FY21, higher than the industry median of 39.6% and 25.5%, respectively. Net margin stood at 27.2% in Q2FY21, higher than the industry median of 15.8%.

Q2FY21 Financial Highlights:

• CMMC announced its quarterly result, wherein the group reported revenue of CAD 064 million, jumped from CAD 91.089 million in Q2FY20. The surge was aided by strong momentum from the copper in the concentrate segment (CAD 127.257 million v/s CAD 77.658 million in Q2FY20), supported by a surge in the copper prices.
• Gross profit surged to CAD 786 million, from CAD 30.259 million in Q2FY20, thanks to the higher revenue coupled with a slide cost of sales (CAD (56.278 million v/s CAD 60.830 million a year ago).
• The company posted an operating income of CAD 991 million, as compared to CAD 28.770 million in Q2FY20. The period was marked by a higher general and administration expense (CAD 4.263 million v/s CAD 0.914 million in pcp), while a higher share-based compensation expense (CAD 4.532 million v/s CAD 0.575 million in Q2FY20) remained as a drag.
• The group reported a net income of CAD 662 million, as compared to CAD 31.933 million in Q2FY20.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risk: Volatility in the international commodity prices would dampen the company’s overall performance, including cash flows, margins, and profitability.

Stock Recommendation:

The company reported strong operating results in the recent past, supported by elevated metal prices, which is a key positive. Notably, the company reported its cash flow from operations of CAD 174.167 million in H1FY21, significantly higher than CAD 32.025 million in pcp. The stock of CMMC is available at an EV to EBITDA of 3.6x on an NTM basis, as compared to the industry (Basis Materials) median of 4.9x. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of CMMC at the last closing price of CAD 3.71 on October 14, 2021.

One-Year Technical Price Chart (as on October 14, 2021). Analysis by Kalkine Group

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

Disclaimer

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