Stella-Jones Inc T.SJ

RBC

[retiredcf]

May 8, 2022

Sector Perform

TSX: SJ; CAD 34.85

Price Target CAD 43.00

All values in CAD unless otherwise noted.
Priced as of prior trading day's market close, EST (unless otherwise noted).

Stella-Jones Inc.

Connecting The Dots: SJ flash read-through - Koppers reports Q1 results
Sentiment indicator: neutral

Our view: Stella Jones’ US peer Koppers last Friday reported Q1 results with adjusted EBITDA of $53MM coming in above consensus $50MM. We view this as a neutral read through for Stella-Jones as Q1 headwinds were offset by positive commentary on the outlook. Looking at Q1, Koppers reported lower sales in its Utility Pole and Railway Tie businesses, versus our Tie and Pole estimates for growth at SJ, as well as highlighted on its conference call cost inflation related to freight, fuel and labour, which we view as a potential headwind for SJ during the remainder of year. Despite potential downside to our Q1 estimate, key in our view was commentary that the outlook remains solid. Specifically, management noted in their 2022 outlook that:

• Utility Poles: strong demand due to project work and upgrades that were deferred during pandemic

• Railway Ties: crosstie sales demand expected to increase 3-4% (RBC: +2%)

• Residential Lumber: home renovation and repair expenditures increased 11.5% y/y in Q1 2022; estimated to reach 19.7% in Q3/22

  Overall, we view the above as largely in line with our out year estimates for Ties and Poles at SJ, but point to upside to our Residential Lumber estimates should the home renovation trends noted above materialize in 2022. SJ reports results on May 11, for further detail see our Q1 preview note here.

  What happened? Key highlights from Koppers Q1 results below:

• Q1 sales for Railroad and Utility Products and Services (RUPS) decreased by -4.4% y/y. Sales decreased from prior year, primarily related to lower volumes of utility poles in the U.S. and Australia, along with lower sales volumes of crossties for both Class I and commercial railroads, partly offset by pricing increases and improved demand in maintenance-of-way businesses. The railroad business experienced lower absorption of fixed costs due to lower tie throughput as a result of decreased purchases of untreated crossties by Class I customers.