TD They have a $96.00 target. GLTA
Stella-Jones Inc.
(SJ-T) C$77.68
Update and Q4/23 Preview; Constructive on SJ's Margin Outlook
Event
Stella-Jones will report Q4/23 results on February 29 before market open.
Conference call at 10:00 a.m. ET on the same day (1-866-518-4114).
Impact: NEUTRAL
We expect a solid quarter from Stella-Jones. We have modestly increased
our Q4/23 EBITDA estimate (driven by an increase in our margin expectation).
We forecast Q4/23 EBITDA of $121.8mm, which is ~4% above consensus of
$116.9mm. The variance between our estimate and consensus reflects our higher
EBITDA margin forecast (TD at 17.1% vs. consensus of 16.1%), partly offset
by our lower revenue forecast. Recall, on the Q3/23 conference call, SJ guided
to its full-year 2023 EBITDA margin being "closer to the 18% mark", implying a
Q4/23 EBITDA margin of ~16%. However, as discussed in this report, based on
SJ's historical Q4 q/q margin performance, we see the 16% EBITDA margin
for Q4/23 as conservative (our Q4/23 17.1% forecast implies a full-year 2023
EBITDA margin of 18.2%).
For 2024, we forecast EBITDA of $636.9mm, which is ~4% above consensus
of $613.7mm. The variance is again driven by our higher margin expectation
(TD at 17.3% vs. consensus of 16.6%). Our revenue forecast is essentially in-
line (TD/consensus both +10% y/y). Regarding 2024 EBITDA margin outlook,
on SJ's last conference call, management suggested that various external
uncertainties (including higher interest rates and increased supply from the utility
pole industry) could weigh on SJ's EBITDA margin (primary concern was potential
pricing pressure in the non-contract utility poles market). SJ also noted that it
remains "very confident" in achieving its previously communicated 16% annual
EBITDA margin target for 2024. Although the consensus 2024 EBITDA margin
estimate of 16.6% is modestly above SJ's aforementioned 16% target, we
view the Street's forecast as conservative. We see expected 2024 growth in
contract poles sales and spot market railway ties sales as helping to partly offset
possible non-contract poles market pricing headwinds, and supporting our 17.3%
margin forecast.
TD Investment Conclusion
We view SJ as a high-quality company that offers investors a mix of growth potential
and defensive characteristics, and we see the stock's valuation as attractive. We
reiterate our BUY rating.