Expanding Timber Operations And Renewable Energy Initiatives May Mitigate Future Revenue Declines

Key Takeaways

• Internalizing operations and monetizing timberland and real estate ventures could boost production, reduce costs, and positively impact future revenue and earnings.
  
• Renewable energy projects and environmental solutions like carbon credit sales diversify income sources, providing stable revenue streams and supporting long-term growth.
  
• Weak market conditions and operational challenges, including pricing declines, contractor issues, and potential tariffs, threaten Acadian Timber's revenue and margin stability.

Catalysts

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

• Acadian Timber is expanding its harvesting operations in Maine by internalizing operations, which is expected to increase production in 2025 and reduce operating costs, potentially improving net margins.
  
• The company intends to monetize newly acquired timberland through harvesting operations and diversified land use opportunities, including residential lot sales, which could positively impact future revenue growth.
  
• Acadian continues to explore renewable energy opportunities, such as wind power potential in New Brunswick and leasing Maine timberland for renewable energy projects. These steps could provide new revenue streams and improve earnings in the long term.
  
• The introduction of an Environmental Solutions segment, highlighted by carbon credit sales, is contributing to diversified income sources. This segment is expected to maintain stable demand and pricing, thus supporting overall revenue stability.
  
• A strong focus on developing real estate capabilities suggests Acadian Timber could see additional revenue from residential lot sales and other real estate ventures, boosting revenue and improving earnings.

Acadian Timber Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Acadian Timber's revenue will decrease by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 18.7% today to 14.1% in 3 years time.
• Analysts expect earnings to reach CA$15.1 million (and earnings per share of CA$0.94) by about February 2028, down from CA$21.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.7x on those 2028 earnings, up from 14.5x today. This future PE is greater than the current PE for the CA Forestry industry at 14.5x.
• Analysts expect the number of shares outstanding to grow by 2.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.19%, as per the Simply Wall St company report.

Acadian Timber Future Earnings Per Share Growth

Risks

• Weak end use markets and abundant regional sawmill residuals have led to decreases in the pricing for several products, such as softwood and hardwood sawlogs and pulpwood, which could continue to negatively impact revenues and margin stability.
  
• Maine operations are experiencing ongoing issues with contractor availability, affecting volumes and potentially increasing costs, which could lower net margins and disrupt profit generation.
  
• A 63% decrease in biomass pricing due to more roadside sales compared to delivered sales signifies vulnerabilities in pricing power, which could affect overall earnings from biomass.
  
• The refinancing of maturing debt in 2025 under similar terms but with higher interest rates could increase interest expenses, impacting net income and free cash flow.
  
• Potential tariffs in forest product companies in both the U.S. and Canada may result in added costs or reduced competitiveness, potentially impacting revenues and margins if imposed.

Valuation

• The analysts have a consensus price target of CA$20.5 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$106.4 million, earnings will come to CA$15.1 million, and it would be trading on a PE ratio of 33.7x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of CA$17.66, the analyst price target of CA$20.5 is 13.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.