Post by
retiredcf on Aug 14, 2023 9:07am
RBC Report
Their upside scenario target is $93.00. GLTA
Outperform
TSX: SJ; CAD 66.51
Price Target CAD 79.00 ↑ 69.00
Stella-Jones Inc.
US infrastructure spending represents upside to out-year consensus estimates in our view
Our view: SJ shares are up today on strong Q2 results and positive commentary on the outlook. While the shares are up +42% YTD (vs TSX at 4.6%), we still see room for more. Key is that US infrastructure spending in our view represents meaningful upside to consensus expectations. Stella- Jones' peer and US steel producers have both pointed to expected benefit from infrastructure spending late 2023 / early 2024, and we expect SJ to benefit over a similar time frame. We therefore view further colour from SJ management on the topic (expected over the coming quarters) as an important catalyst for the shares.
Key points:
Q2/23 above. Adj. EBITDA of $178MM was above consensus $160MM (RBC: $157MM) as residential lumber revenue and margin came in higher. Key is that the beat came despite temporary headwinds in the Utility Pole segment. Margins came in at 18.3% vs. our 16.5%. See Exhibit 1.
Management points to upside to 2023 EBITDA margins. Management provided an update on the 2023 outlook noting that utility poles should still be able to deliver +20% organic growth despite Q2 headwinds, that railway tie H2 revenue growth is forecast up low-single digit, and that residential lumber is expected to remain within the previously guided range of $600MM to $650MM. Moreover, management expects EBITDA margin to come in above 16% on solid pricing. Both pole and tie commentary were consistent versus our prior expectations, with the delta being from better than expected margin and res lumber demand.
Continue to see upside to Investor Day targets. We remind investors that SJ’s 3-year targets do not include any benefit from US infrastructure spending. However, both Koppers and the US steel producers last week noted that they are currently seeing the design and budgetary work being done on infrastructure projects and that they expect to benefit in H2/23 and early 2024. While SJ mgmt maintains that it is too early to quantify any benefit, we, however, continue to see upside longer term and remain very positive on the opportunity.
Raising estimates. We have increased our estimates to reflect Q2 results and recent M&A. Our 2023E EBITDA increases to $552MM (from $523MM) and our 2024E to $569MM (from $552MM). Our 2025E increases above management’s 3-year target for 2025 EBITDA of >$576MM.
PT increases to $79 (from $69); Reiterate OP. Our price target increases due to our higher estimates. We also took higher our target multiple to 10.5x (from 9.5x) reflecting the opportunity we see surrounding infrastructure spending longer term. Applying our higher estimate to our higher target multiple results in our price target increasing to $79 (from $69). Reiterate our Outperform rating on the shares.
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