As predicted, they bump their target by $9.00. GLTA
STELLA-JONES INC.
Strong Pole Demand Likely To Sustain Elevated Margins
Our Conclusion
We are maintaining our Neutral rating on Stella-Jones while raising our price
target to $83 (from $74) on increased estimates and the roll forward of our
valuation year to 2025. With the shares trading near all-time highs, we see
more compelling upside across our commodity wood and paper/packaging
coverage universe. Although remaining M&A prospects in wood poles/ties
have revenues only totaling ~US$150MM (~5% of 2025E sales) over the
next few years, potential product expansion in poles beyond wood may
support a larger M&A pipeline and even stronger pole pricing.
Key Points
Raising 2024 EBITDA Estimate By 7%: We are increasing our EBITDA
forecast for the fourth quarter by 8% to $125MM, while our 2024 estimate
moves up 7% to $623MM (largely driven by stronger margin assumptions for
poles and ties), and we have set our 2025 estimate at $631MM. On the
EBITDA margin front, we now see full-year 2023 levels averaging 18.2%
(above guidance of ~18% and the 14.6% average in 2022), with margins
moderating to 16.8% next year and stabilizing at 16.5% in 2025 (above the
16% long-term target the company outlined in May).
For poles, our forecast assumes price-fueled organic sales growth of over
20% this year (close to the 21% price-driven gains achieved in 2022), with
16% improvement in 2024 (largely double-digit volume growth), before
category growth rates normalize in the high-single digit range from 2025
(combination of inflation-type pricing gains and mid-single digit annual
volume improvement). Risks to our category forecast would be on the pricing
side (particularly the ~30% of spot business) as additional wood capacity
comes on from SJ and Koppers, while RS Technologies also brings on more
composite pole output and Valmont further improves its concrete offerings.
Over the next several years, robust pole demand is expected to be sustained
by: 1) an emerging ‘up-cycle’ (average pole 50+ years now with an average
lifespan of 65 years); 2) government infrastructure/broadband investments;
3) 5G roll-out (means more higher-margin thicker poles needed to fortify);
4) as well as pressure to replace more last-mile poles to support larger
transformers (given increasing single-family electricity consumption as air
conditioning and Level 2 home electric chargers become more common).
For the other key categories, we remain conservative on ties, forecasting
only 3% Y/Y annual organic growth over 2024/25 (inflation-level pricing pass-
throughs). For residential lumber, although R&R trends have deteriorated in
the U.S., demand for treated lumber has proved surprisingly resilient in the
company’s core Canadian market.
Pole Upside Priced In Now? We see a relatively low average FCF yield in
2024/25 of 3.8%, below low-volatility packaging names (CCL/WPK expected
to average 5.8%) and well below commodity wood names (we see a 8.5%
FCF yield from WFG over the same period)