Buy this building supply stock for growth and income

CanWel Building Materials Group has made a sound acquisition. Its earnings are set to rise this year and next. It remains a buy for long-term price gains and attractive dividends.

CanWel Building Materials Group (TSX─CWX) operates treating and planing facilities in Canada and the U.S. It distributes building materials, lumber and renovation products from centres across Canada and near San Francisco and Los Angeles. The company remains a buy for long-term share price gains and attractive dividends. Its earnings per share are expected to rise this year and next. However, buy only if you can accept buying a stock that we rate ‘Higher Risk’.

In 2015, CanWel earned $12.3 million, or 35 cents a share. This was down by 18.6 per cent from $12.3 million, or 43 cents a share, the year before. It issued 13,696,300 shares to help pay for an acquisition. There are now 42,414,598 shares. CanWel prefers to focus on its ‘adjusted EBITDA’. In 2015, its Earnings Before Interest Taxes Depreciation and Amortization came to $32.7 million or 92 cents a share. This was down by a more moderate eight per cent from $28.7 million, or a dollar a share, the year before.

CanWel’s lower earnings are confirmed by its lower cash flow. In 2015, it generated cash flow of $17.8 million. This was down by 19.8 per cent from cash flow of $22.2 million, a year earlier. (We included income taxes and interest paid.) This fell short of dividend payments of $18 million, capital spending of $4.9 million and an acquisition of $37.5 million.

Forest products acquisition looks promising

On March 9, CanWel agreed to acquire Jemi Fibre. This vertically-integrated forest products company operates mostly in B.C. and Saskatchewan. It owns 136,000 acres of private timberlands, harvesting, and several post-peeling plants, two specialty-wood treatment plants and one specialty saw mill.

The acquisition is highly likely to take place. After all, both boards of directors have approved the transaction. More important, investors who own about 52 per cent of Jemi Fibre have signed “irrevocable support agreements”.

CanWel expects the acquisition to immediately add to its earnings and cash flow per share. It expects them to grow by over 15 per cent a year. In the shorter run, refinancing Jemi Fibre’s senior loans will cut its interest costs by $7 million. Jemi Fibre also has big losses than can reduce CanWel’s tax bill.

In the longer run, CanWel expect to cut costs. It sees this coming from “increased scale and purchasing benefits on pressure treatment inputs”. The company also hopes to raise its revenue thanks to its “established sales and distribution channels”.

CanWel is taking steps to limit its risk

CanWel limits its risk. It sold shares for $20 million to help pay for the acquisition. This will keep the company’s debt-to-equity ratio under control. It writes: “The transaction diversifies CanWel’s operating and production capacity, providing a stable long-term revenue base and vertical integration via a sustained source of fibre supply.” This cuts its risk.

CanWel’s earnings are expected to jump by over a half this year, to 53 cents a share. Next year, it expects its earnings to rise by 11.1 per cent, to 59 cents a share. Based on these estimates, the shares trade at attractively low price-to-earnings ratios of 9.4 and 8.4 times, respectively.

CanWel will cut its dividend

CanWel Building Materials Group now pays a dividend of 56 cents a share. But to reduce demands on its cash, it will cut its dividend.

CanWel refers to a “reduction in CanWel’s pro forma dividend payout ratio to approximately 75%”. In 2016, CanWel is expected to earn 53 cents a share. Multiply this by 0.75 and you get a dividend of nearly 40 cents a share. This would yield an attractive eight per cent.

Management wants CanWel to succeed. After all, they control 23.4 per cent of the shares. CanWel remains a buy for long-term price gains and attractive dividends.


The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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