Renewable Energy And Real Estate Expansion May Help Amid Declining Timber Prices, But Production Challenges Loom

Key Takeaways

• Expansion into real estate and renewable energy sectors could enhance revenue and earnings growth through new revenue streams.
  
• Establishing internal harvesting operations in Maine may boost operational efficiency and positively impact net margins and earnings.
  
• Decreased pricing and operational challenges, including weather and contractor issues, threaten revenue and margins, while higher debt costs could further impact net earnings.

Catalysts

Provides forest products in Eastern Canada and the Northeastern United States.

• Acadian Timber has established its own harvesting operations in Maine, which is expected to address contractor availability issues and increase production. This internal capacity is likely to improve operational efficiency and cost structure, positively impacting net margins and earnings.
  
• The expansion into real estate and renewable energy sectors, including residential lot development and potential renewable energy leases, could serve as significant new revenue streams, enhancing Acadian’s revenue and earnings growth.
  
• The sale of registered voluntary carbon credits has been a lucrative addition, with nearly all of the first tranche sold. The registration of further tranches in 2025 is expected to bolster revenue and potentially improve net margins due to low variable costs associated with this business.
  
• The favorable shift in customer mix, particularly in New Brunswick, leading to increased freehold sales over Crown licensed timber sales, can enhance revenue stability and potentially improve margins as freehold sales typically contribute more per unit than timber services.
  
• The proactive refinancing of long-term debt at higher interest rates, with a focus on maintaining a strong liquidity position, positions the company well to pursue growth initiatives with minimal financial constraints, potentially driving future earnings growth.

Acadian Timber Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Acadian Timber's revenue will decrease by 0.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.3% today to 14.7% in 3 years time.
• Analysts expect earnings to reach CA$16.3 million (and earnings per share of CA$0.97) by about July 2028, down from CA$19.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.1x on those 2028 earnings, up from 16.9x today. This future PE is greater than the current PE for the CA Forestry industry at 15.0x.
• Analysts expect the number of shares outstanding to grow by 2.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.48%, as per the Simply Wall St company report.

Acadian Timber Future Earnings Per Share Growth

Risks

• Pricing for key products such as softwood sawlogs, hardwood sawlogs, and softwood pulpwood has decreased due to weaker end-use markets, which could negatively impact revenue.
  
• The company faces challenges with contractor availability, particularly in Maine, which could affect production volumes and increase operational costs.
  
• Persistent unfavorable weather conditions and longer-than-usual customer shutdowns have impacted volumes and could continue to disrupt operations, affecting revenues and margins.
  
• Operating costs remain high due to greater hauling distances and increased contractor rates, which could pressure net margins if not offset by increased revenues or cost efficiency measures.
  
• Acadian has refinanced a portion of its long-term debt at higher interest rates, which could increase financing costs and reduce net earnings in future periods.

Valuation

• The analysts have a consensus price target of CA$19.5 for Acadian Timber based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$110.6 million, earnings will come to CA$16.3 million, and it would be trading on a PE ratio of 29.1x, assuming you use a discount rate of 8.5%.
• Given the current share price of CA$18.17, the analyst price target of CA$19.5 is 6.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.