One of the leading industries in Canada is the forest product industry. With the United States being the largest trading partner, more than two-thirds of Canadian forest products are exported and it contributes $17.1 billion in net trade.
Among these, Acadian Timber (OTC:ACAZF) has emerged as one of the leading suppliers of primary forest products in Eastern Canada and Northeastern U.S. It also provides management services in New Brunswick. Acadian Timber Corp is a good performer, and it has shown decent growth in 2020 (till the third quarter) in terms of its sales and cash flows.
During the COVID-19 pandemic period, the Canadian forest industry has faced many challenges, especially in the availability of forest fibers and this led to production in companies getting affected. In the meantime, Acadian Timber has undertaken and implemented comprehensive plans to control the activities of the organization and to protect the interest of the people. It is definitely a TSX stock that should be on the radar.
Steady Growth
In the third quarter, the company’s revenue grew 101.2% to $23.2 million compared to its second quarter revenue of $11.5 million. Last year, Acadian Timber recorded $25.4 million in revenue in the corresponding quarter.
The operating cost of the company has decreased to $18.8 million compared to last year's $20.6 million as the company focused on controlling the administrative expenses. But the EBITDA of the company reduced by 10% (from $5.1 million in 2019 to $4.5 million in 2020).
The free cash flow in 2020 is $3.1 million compared to $4.2 million in 2019. The reason for deviation in the financials compared to last year is due to the effect of the COVID-19 situation which resulted in the decline of the demand for hardwood pulpwood.
The company maintained its operating performance in the last three quarters which also improved in the third quarter. Net income of the company in the third quarter stands out at $5.2 million compared to the net loss of $10.9 million in 2019.
In 2019, Acadian Timber paid a termination fee to Brookfield which resulted in the net loss. Acadian refinanced itself with long-term debt of $20.4 million. The company had a non-cash unrealized foreign exchange gain in the long-term debt which also impacted the net profit of the company in 2020.
Good Dividend Paymaster
Investors always prefer to invest in shares that guarantee them an assured return over the years. Therefore, a company with a sustainable dividend payout ratio is mostly preferred by the investors as it also determines the stability of the company. Acadian Timber has maintained its dividend payout in both the second and the third quarters with a payout of $4.8 million to its shareholders. Acadian prefers to distribute dividends from its available cash.
Despite the pandemic in 2020, the company maintained almost the same payout ratio compared to 2019 which indicates a level of stability in Acadian Timber and also the good cash position of the company.
However, a point of concern is that the payout ratio of the company is 154%. Since the company is maintaining a low retention ratio, Acadian Timber will have to maintain its profit in the future to maintain its sustainability.
It helps that the forest industry in Canada indicates that demand for forest products will hike in 2021 which will also help the companies to recover from their current state. In such a scenario, Acadian should be able to increase profits in 2021 and should be able to maintain its sustainability.
Good Ratios
Acadian Timber has maintained its PE Ratio of 11.91 and price to book ratio of 0.97. The market capitalization of the company is currently $272 million. The company has also shown growth in its operating margin of 22.07% and a return of 8.27%.
The average PE ratio maintained in the forest industry in Canada is 16.8x which indicates that the share price of Acadian Timber is comparatively low. Since the PE ratio indicates the comparison of EPS with the market price of the share, currently Acadian Timber is indicating low earnings compared to the market.
Apart from its financials, the company is also performing well in its non-financial areas. Acadian Timber focused on the safety and health measures in the current quarter taking the pandemic into consideration. During this period, the company did not face any loss or accidents from its internal environment. The company has also abided by government compliances properly over the years which has given them a competitive advantage in the industry.
The stock is trading at $16.68 right now and analysts have given it a target of $16.7. This suggests that the stock is fairly valued.