As can be seen, aside from Canaccord, the remainder of the revised targets still range between $9.00 and $12.00 so as often happens, we may have had an overreaction to the latest earnings. GLTA
Canaccord Genuity analyst Yuri Lynk expects the recent drop in lumber prices to pressure Doman Building Materials Group Ltd.’s margins moving forward.
Accordingly, in the wake of the release of weaker-than-anticipated second-quarter financial results, he lowered his rating for the Vancouver-based company, formerly known as CanWel Building Materials Group Ltd., to “hold” from “buy.”
“With the benchmark 2x4 SPF lumber price down 74 per cent from its record high set on May 10, the investment case for DBM has been turned on its head,” he said. “We see consensus estimates coming down materially and expect the gross margin outperformance witnessed over the last three quarters to turn to underperformance in Q3/2021 as falling prices crimp profitability. CanWel, proforma Hixson, generated EBITDA of $135-million in 2019 and $250-million in 2020. Our 2022 EBITDA estimate sits at $203-million, which implies lumber prices average US$525 per thousand board feet and a gross margin of 14.5 per cent.”
After the bell on Monday, Doman reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $94-million, up 187 per cent year-over-year but narrowly lower than Mr. Lynk’s $94.4-million projection. Revenue rose 83 per cent to $756.8-million, missing the analyst’s estimate of $743.2-million, while margins rose 3 per cent year-over-year to 17.3 per cent, topping his 17.0-per-cent forecast.
“Until higher cost inventory is averaged down, management expects the lower pricing environment to offset the margin expansion observed in H1/2021,” the analyst said.
“During the call, management mentioned that following a soft end to Q2, volumes have been picking up in Q3 aided by the noted price reductions in construction materials. We thus believe we will see recovering volumes reach a more normalized level (similar to 2019) throughout the remainder of 2021 and into 2022. Longer-term demand drivers remain solid with the rate of new housing starts in Canada and the U.S. increasing 44 per cent year-over-year in the quarter.”
After adjusting his estimates to account for lumber pricing headwind and the “transformational” acquisition of Texas-based Hixson Lumber, Mr. Lynk cut his target for Doman shares to $7.50 from $12. The average is $11.29.
Elsewhere, others making target adjustments include:
* Stifel’s Anoop Prihar to $12 from $14 with a “hold” rating.
“While profit margins in the near term are expected to be impacted by the recent decline in lumber prices, we expect margins will recover to more normalized levels by Q4/21 and into the next year,” he said.
* Raymond James’ Steve Hansen to $10.50 from $13.50 with an “outperform” rating.
“We are trimming our target price ... based upon the near-term headwinds associated with the sharp correction in LBM prices, an outcome that reflects consumer resistance to the stratospheric prices observed earlier this year. Notwithstanding these changes, we reiterate our OP2 rating based upon our constructive view of the North American housing outlook and the transformational benefits we foresee from Doman’s recent Hixson acquisition,” he said.
* CIBC’s Hamir Patel to $9 from $10 with an “outperformer” rating.
“While the sharp correction in commodity prices will weigh on organic sales comps and margins in H2/21, we continue to see DBM as well-positioned to benefit from a multi-year period of robust shipments for treated lumber across North America (as well as heathy Canadian distribution volumes) given low mortgage rates, rising home equity levels and an ageing NA housing stock,” said Mr. Patel. “Additionally, we expect the recent US$408-million Hixson Lumber acquisition (closed June 4) to open up additional acquisition opportunities for DBM across the U.S. beyond its prior focus on the U.S. West Coast.”
* RBC Dominion Securities’ Paul Quinn to $11 from $12 with an “outperform” rating.
“Doman Building Materials Group Ltd. reported Q221 results that were below our expectations but largely in line with consensus as the rapid decline in lumber and panel pricing left Doman holding onto high-priced inventory. Although we expect results will be choppy over the next few quarters, we still like the Doman story as the company generates significant cash flow and integrates recent acquisition,” said Mr. Quinn.