On today’s TSX Breakouts report, there are 71 stocks on the positive breakouts list (stocks with positive price momentum), and 18 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a dividend stock that is on the positive breakouts list. The stock is trading at a reasonable valuation, relatively in-line with its historical average. Analysts are anticipating modest gains from the stock with an expected 12-month price return of nearly 11 per cent and an anticipated total return of over 17 per cent (including the attractive 6.8 per cent dividend yield).
The security highlighted today is Acadian Timber Corp. (ADN-T).
For the past year, the share price has been relatively stable, trading sideways largely between $16 and $17.50. Potential catalysts include strengthening new residential construction activity and an acquisition that would diversify its operations.
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Acadian is one of the largest timberland operators in two core regions, New Brunswick and Maine.
A potential catalyst for the company would be an acquisition that would diversify its operations beyond these two regions.
When asked about recent acquisitions in the U.S. on the fourth-quarter earnings call held last week, interim president and chief executive officer Erika Reilly said, “We did clearly watch Weyerhaeuser sell its 1.2-million acres of Timberlands in Michigan and Montana and continue to monitor that situation. We also noted Rayonier’s acquisition of Pope Resources, clearly, publicly-traded peers of ours. There have been also a couple of notable transactions in Maine that represent about 350,000 acres done on a bilateral basis…We continue to monitor situations, but I think we’ll just leave it at that for now.”
In terms of product mix, the company produces softwood and hardwood sawlogs, pulpwood, and biomass by-products, which are sold to roughly 85 customers (lumber mills, and pulp and paper mills).
In 2019, solid wood represented 55 per cent of its log sales, of which softwood lumber represented 42 per cent and softwood specialty products accounted for 1 per cent of sales, while hardwood lumber and hardwood specialty products, accounted for 7 per cent and 5 per cent of log sales, respectively. The second largest business segment was packaging, tissue and specialty paper, representing 23 per cent of log sales. Engineered wood products accounted for 9 per cent of log sales, fuel 7 per cent, and pulp represented 6 per cent of log sales. Demand for its sawlogs and wood products is driven by new residential construction activity.
After the market closed on Feb. 12, the company reported better-than-expected fourth-quarter financial results. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $6.586-million (adjusted EBITDA margin of 25 per cent), above the consensus estimate of $5.2-million. The share price advanced 0.8 per cent the following day.
The company generates strong free cash flow. Acadian was previously an income fund and converted to a corporation in Jan. 2010.
Last year was a transformational year for the company with Acadian internalizing its asset management and administrative responsibilities, ending its asset management agreement with Brookfield Timberlands Management LP.
The internalization was anticipated to be immediately accretive to free cash flow by roughly 5 per cent with cost savings from the elimination of the asset management and performance fees paid to Brookfield LP.
Ms. Reilly provided an update on this transition on the earnings call. She said: “Nearly all functions have been fully transitioned and are now handled by Acadian employees. We are also starting to realize the financial benefits of no longer having to pay management and performance fees. As Brian mentioned at the start of the call, Adam has joined our senior management team as CFO and will be based in Edmundston [located in New Brunswick]. We believe the entire team will benefit from having regular in-person access to his strong financial reporting, capital markets, financing, and M&A [merger and acquisition] experience, and I’m personally looking forward to working with him. While I want to express my thanks to Brian for his help through this transition phase, finding a permanent CFO is an important step in Acadian’s internalization process.”
Ms. Reilly also provided a slightly positive outlook for the company’s largest segment, the softwood lumber market, saying: “The softwood lumber market is the end-use market for our softwood sawlogs. This market is expected to benefit from slightly stronger U.S. housing starts in 2020, while the U.S. repair and remodeling sector is expected to hold flat at its 2019 level. Supply side factors, including increased wood from Central Europe and reduced North American exports to China as well as builders’ focus on smaller, more affordable homes, which contain less wood may mute some of the benefits of a more positive U.S. housing outlook.”
With respect to the company’s hardwood market, she said: “Acadian’s hardwood sawlog sales in the U.S. are coming under pressure as an indirect result of Chinese duties on U.S. exports. However, hardwood sawlog sales to Acadian’s Canadian customers remain stable as they are focused on species such as hard maple and yellow birch and on industrial lumber products, including rail ties, pallets and flooring that have not been as impacted by the U.S.-China trade war.” She added, “Demand and pricing for our hardwood pulpwood is expected to remain stable, with our largest hardwood pulpwood customers operating at full capacity.”
On a positive note, Ms. Reilly said: "Demand for softwood pulpwood from our New Brunswick Timberlands remains steady. However, markets for softwood pulpwood in Maine have recently weakened with high regional softwood pulpwood inventory due to the slower-than-anticipated start-up of a pulp mill in the region. Once this mill reaches full operating capacity, demand for this product is expected to improve.”
In 2019, Brookfield Asset management sold its ownership position to Macer Forest Holdings Inc. At year-end, Macer Forest Holdings Inc. had an ownership position of approximately 45 per cent. Macer is an investor in forest and recreational lands.
Dividend policy
The company pays its shareholders a quarterly dividend of 29 cents per share, or $1.16 per share yearly, equating to a current annualized yield of 6.8 per cent.
The company has announced dividend increases for the past three consecutive years. The most recent dividend hike was announced in Feb. 2019. Prior to that, dividend hikes were announced in May 2018, and Feb. 2017.
The free cash flow payout ratio was 91 per cent in the fourth- quarter.
Analysts’ recommendations
There are five analysts who actively cover this small-cap stock with a market capitalization of $286-million, of which two analysts have buy recommendations and three analysts have neutral recommendations.
The firms providing recent research coverage on the company are as follows in alphabetical order: CIBC World Markets, Credit Suisse, Raymond James, RBC Dominion Securities and Scotiabank.
Revised recommendations
Earlier this month, CIBC’s Hamir Patel increased his target price to $18 from $17.
Financial forecasts
The consensus EBITDA estimates are $23.8-million in 2020, up slightly from adjusted EBITDA of $23.6-million reported in 2019, and $24.5-million in 2021.
Earnings forecasts have been relatively steady. For instance, three months ago, the consensus 2020 EBITDA estimate was $23.9-million.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 15.9 times the 2020 consensus estimate, relatively in-line with its three-year historical average of 15.7 times but below its peak multiple of approximately 18 times during this time period.
The average one-year target price is $19, implying the stock price has nearly 11 per cent upside potential, and a potential total return of over 17 per cent including the 6.8 per cent dividend yield.
Individual target prices are as a follows in numerical order: two at $18 (from Mr. Patel and RBC’s Paul Quinn), $19, and two at $20 (the high on the Street is from Credit Suisse’s Andrew Kuske and Raymond James’ Daryl Swetlishoff).
Insider transaction activity
Over the past year, no individual on the management team or board of directors has reported buying or selling activity in the public market.
Chart watch
Year-to-date, the share price is relatively unchanged, up 3 per cent. Last year, the share price traded in a tight trading band, between $16 and $17.50 for the most part (dipped to nearly $14 in Dec. 2018 with the market meltdown). On a longer-term basis, the share price has traded in a range, largely between $16 and $20 since the beginning of 2016.
In terms of key resistance and support levels, the stock price has initial overhead resistance between $17.50 and $18. After that, there is major resistance around $20. Looking at the downside, there is strong technical support around $16.
This small-cap stock can be thinly traded. For example, on Friday, the share price rallied 1.6 per cent with just over 28,000 shares traded.
The three-month historical daily average trading volume is approximately 13,000 shares.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
Jennifer Dowty