RBC's assessment after reportingUpside scenerio is $13
GLTA
SM
March 11, 2024 Doman Building Materials Group Ltd. Expanding its reach Our view: Doman reported Q423 Adjusted EBITDA of $33MM, which was close to consensus of $35MM. While Doman’s revenues declined 18% y/ y in 2023, its unit volumes were up, and its Adjusted EBITDA declined only 3.5%, which in our view demonstrates the resiliency of its business model through a slower market. We continue to like Doman’s well-covered dividend, and we expect the company to be able to continue expanding through M&A in the near term. As such, we see an attractive return profile and reiterate our Outperform rating.
Key points: Reiterating our $10 price target and Outperform rating. Our price target is based on a 7.25x EV/EBITDA multiple on our 2024E EBITDA of ~$215MM. We expect Doman shares to trade near the high end of the typical Canadian Paper & Forest Products trading range (5.0x to 7.0x), reflecting its ability to pass through prices to customers.
A brisk pace of business to start the year. Management noted that treated lumber demand has surprised them across all regions to start the year, with good takeaway at the store level. Doman also noted that it saw new organic growth in Ontario, and that while it is forecasting a “good to slightly up” volume year versus 2023, it also thinks it is “going to hit those metrics pretty easily.”
Entering additional markets in U.S. southeast, east coast. On March 1, Doman announced an all-cash acquisition of assets from Southeast Forest Products Treated Ltd., which added 300 mmfbm of lumber treating capacity to its portfolio and expanded the company’s footprint into eight new southeastern and eastern states. Doman should also be able to use the acquisition to grow its distribution business over time, with a primary focus on composite decking, redwood and cedar products, and railing systems. Transaction metrics and synergies targets were not disclosed, but it did note that the acquisition was within its “normal metrics” (Doman typically targets acquisitions in the 4–6x EBITDA range), and that it expects synergies will likely take a full turn out of the multiple it paid.
Management expects to be active on the M&A front. Doman stated that it is back on the M&A path as it strives to gain a national footprint in the U.S. and get closer to its national customer base, and that “you’re going to probably see a few more things happening in the next 12 to 18 months.”
Positive comments on the outlook for lumber. Doman stated that the lumber market looks “firm” following a number of curtailments, and while it does not anticipate a “runaway rally”, relatively tight inventory levels should serve as a tailwind for lumber prices. As we recently highlighted in our wood products update, we believe the market has tightened from a supply perspective, and we see potential for solid demand that could be strengthened with interest rate cuts through the year.