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:

• Impressive Margin profile: The company reported higher profitability margins in Q2FY21, as compared to the industry median. A higher margin indicates improved operational efficiency and better cost control techniques compared to the peers. The improvement was also supported by elevated lumber prices in the North America region due to higher demand from construction activities. Gross margin and EBITDA margin stood at 67.3% and 56.8%, respectively, significantly higher than the industry median of 30.7% and 20.9%, respectively. Notably, the company reported its net margin at 39.4%, which is higher than the industry median of 12.7%.
• Ample Liquidity and prudent capital management: The company reported consistent growth in its liquidity, supported by elevated cash flows. At the end of Q2FY21, the company reported available liquidity of USD 3.392 billion, which is the highest in the last six quarters. Current liquidity level seems to be sufficient to fulfill the short-term and long-term capital needs of the group. Meanwhile, the company do not have any schedule maturity before 2024, which again indicates the retention of liquidity.

Q2FY21 Financial Highlights:

• WFG announced its second quarter results, wherein the company posted its revenue at USD 3,779 million, jumped from USD 921 million in the previous corresponding period (pcp). The increase was supported by strong momentum from the USA region (USD 2,726 million v/s USD 568 million in Q2FY20).
• The group reported operating earnings of USD 1,986 million, increased significantly from USD 61 million in pcp. The growth was on account of higher revenue, partially offset by higher costs and expenses. The quarter was marked by higher freight and other distribution costs and also a surge in selling, general and administration expenses.
• Net Earnings were reported at USD 1,488 million, surged from USD 35 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The majority of the company’s revenue derived from the lumber segment, and a volatility in the lumber prices affect the realization, which would hinder the company’s cash flows and margins.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

For the rest of FY21, the company expects the demand for lumber and OSB products are likely to remain higher supported by growth in residential construction, repair and remodelling, and industrial applications. Moreover, underlying housing construction deficit due to several years of underbuilding would have a positive impact on the demand for new housing across the North America, which is a key positive. Considering the above-mentioned facts and valuation, we give a ‘Hold’ rating on the stock of WFG at the last closing price of CAD 92.08 on August 13, 2021.

One-Year Technical Price Chart (as on August 13, 2021). Source: REFINITIV, Analysis by Kalkine Group

First National Financial Corporation

First National Financial Corporation (TSX: FN) is a Canada based originator, underwriter and servicer of predominantly prime residential and commercial mortgages. It is Canada’s largest non-bank originator and underwriter of mortgages and is among the top three in market share in the mortgage broker distribution channel.

Key Highlights

• Growth in origination of mortgages: The origination of mortgages not only drives the growth of MUA but also leverages the Company’s origination platform. In Q2 2021, the Company’s single-family origination increased 71% across the country compared to the same period in 2020, as a result of its strong broker relationship and technology. The commercial segment also rebounded after a slow start in Q1 2021 and increased by 25% to CAD 2.7 billion in Q2 2021 compared to CAD 2.1 billion in pcp. Together, overall new origination in Q2 2021 increased 56% year over year.
• Growth in Mortgage under Administration (MUA): By using the company's origination technology, the business achieved remarkable growth in its mortgage under administration (MUA). In comparison to CAD 114.9 billion in pcp, MUA increased by 6% to CAD 121.5 billion on June 30, 2021. Because the platform has a fixed cost, an increase in mortgage origination lowers underwriting expenses, which is a key positive.
• Emphasizing on IT and technology: The company maintains a strong broker relationship and has utilized its IT and technology in a prudent manner, which has resulted in robust growth. The Company believes the technology and overall business model has been advantageous during the pandemic period and led to increased origination volumes. Additionally, the management believes this strategy would provide long-term profitability and sustainable brand recognition for the company.
• An Income Play: The group has a solid history of stable dividend payment, backed by consistent profitability. Moreover, it has increased its dividend distribution to CAD 2.35 per common share on an annualized basis. Moreover, at the last closing price, the stock is offering a lucrative dividend yield of ~5.0% amid low interest rate scenario.
  

Financial overview of Q2 2021 (In thousands of Canadian dollars)

Source: Company

• Revenue in the second quarter of 2021 increased by 6% to CAD 365.1 million from CAD 344.6 million in the second quarter of 2020. The increase was affected by changes in the fair market value of financial instruments related to interest rate movements in both quarters.
• Income before income taxes increased to CAD 70.1 million in the Q2 2021 from CAD 68.9 million in the previous corresponding quarter. The increase was affected by changing capital market conditions.
• The company reported its net income at CAD 52.4 million compared to CAD 50.8 million in pcp,

Risks associated with investment

The company’s profitability is dependent on current bond markets rates, which affect the value of gains and losses on financial instruments arising from the Company’s interest rate hedging program. Thus, interest rate plays a vital role for the business, and volatility in the interest rate would affect the company’s performance. 

Valuation Methodology (Illustrative): Price to Earnings 

Stock recommendation

The second quarter performance demonstrates the strength of the company’s business model. The company witnessed an exceptional market demand for mortgages in a robust real estate market, which was a key positive. With the strong results in Q2 2021, management remains positive about the remainder of 2021. Moreover, the Company is confident that its strong relationships with mortgage brokers and diverse funding sources will continue to set “First National” apart from its competition. Additionally, the Company would continue to generate income and cash flow from its CAD 33 billion portfolio of mortgages pledged under securitization and CAD 86 billion servicing portfolio, which is commendable. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock at the closing price of CAD 46.75 on August 13, 2021.

One-Year Price Chart (as on August 13, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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