Stella-Jones Inc.
Connecting the Dots: SJ flash read-through – Koppers hosts Investor Day
TSX: SJ | CAD 66.50 | Outperform | Price Target CAD 79.00
Sentiment: Positive
Our take. Stella Jones’s US peer Koppers earlier today hosted its Investor Day, reaffirming its 2023 sales guidance of approximately $2.1B, in line with consensus, while raising its range for adjusted EBITDA to $250–260MM from $250MM, vs. prior consensus of $250MM. Our read on the Investor Day as it pertains to Stella-Jones is positive, as Koppers highlighted confidence in growth driven by profitability improvements and that it is on track to deliver against 2025 goals, with potential upside to adjusted EBITDA and margin for Railroad and Utility Products and Services (RUPS) and Performance Chemicals (PC). On the outlook, Koppers highlighted upcoming infrastructure spending, in particular $42B over five years awarded for broadband deployment in the U.S., with a significant portion earmarked for utility poles, as an important driver of long-term growth. Recall that SJ’s long-term guidance does not include any benefit from infrastructure spending; we therefore see potential upside to long-term targets as infrastructure funds begin to be spent, likely in the near term in our view. Koppers today also noted that “repair and remodeling market trends are driving strong demand for wood treatment chemicals”, a positive for SJ’s residential lumber segment. We view these comments as analogous to those from Home Depot at a conference earlier this week, where Home Depot management cited a “surprisingly strong” macro environment and expectations of a period of lumber disinflation rather than deflation, suggesting in our view upside to SJ’s residential lumber guidance. While SJ shares are up meaningfully in the last year, we still see upside on the back of infrastructure spending, and we view positively the commentary from Koppers’s Investor Day presentations today.
What happened? Stella Jones’s US peer Koppers today hosted its Investor Day. More detail below:
• Outlook: Koppers reaffirmed 2023 guidance for sales of approximately $2.1B (cons. $2.1B), vs. $1.98B in the prior year, while increasing its range for adjusted EBITDA to $250–260MM from $250MM (cons. $250MM), vs. $228MM in 2022.
• Upside to EBITDA margin driven by RUPS and PC: We point to the Investor Day presentation, which projects 11–13% margin for RUPS and 17–20% for PC, expected to drive an overall increase in margin to 13–15% by 2025 (cons. 13%). Distinguishing business segments, Koppers commented that the RUPS business has +$30MM more in pricing to get where it needs to be, while focus for PC is maintaining pricing as low-cost inventory flows through in H2/23.
• Infrastructure spending a positive tailwind: We point to the $1.2T Infrastructure Investment & Jobs Act and $42B in US Infrastructure Spending over the next five years. With 140MM poles in existence and an aging network, management expects to replace 2–2.5MM poles per year, alongside replacement demand of 18.8–22MM crossties in the US and Canada annually per the Railway Tie Association (RTA).