Stella Jones Inc. (SJ-T) · Stella-Jones Inc. ("Stella-Jones" or the "Company") was founded in 1992...

STELLA JONES INC | Sept 2016

Stella Jones Inc. (TSE: SJ) Highlights Recent Results: Stella-Jones reported 2016 3rd quarter results as follows. The company reported revenues of $512.6 million, up 18.4% from $433.1 million a year ago.16.1% increase in net income to $45.7 million, or $0.66 per diluted share, versus $39.3 million, or $0.57 per diluted share, last year. There was a significant debt reduction of $92.5 million during the quarter resulting from cash flow generation. The conversion effect from fluctuations in the value of the Canadian dollar, Stella-Jones' reporting currency, versus the U.S. dollar, had a positive impact of $3.0 million on the value of U.S. dollar denominated sales when compared with last year's third quarter. Excluding these factors, organic growth was approximately $18.9 million, or 4.4%. Railway tie sales amounted to $186.6 million, down 7.0% from $200.6 million last year, primarily as a result of lower industry demand in the third quarter following a strong first half in 2016. Sales of utility poles reached $160.0 million, compared with $142.3 million last year. Excluding the currency conversion effect and the contribution from acquisitions, sales declined approximately 6.2%.. Sales of residential lumber totaled $107.3 million, up from $53.2 million last year. This strong increase reflects sales of $30.5 million from the Ram acquisition, as well as the impact of the transition from treating services only for wholesalers to value-added full service direct offering for retailers. Industrial product sales declined to $27.5 million, from $28.4 million a year ago, due to the timing of orders for rail-related products in the United States. Logs and lumber sales reached $31.3 million, versus $8.5 million last year, due to procurement efforts to support residential lumber requirements and the timing of timber harvesting.

Kay Adekoya Michelle Xia [email protected] [email protected] Wei Xue Sashia Godet [email protected] [email protected]

Key Statistics* Sector Basic Materials Industry Forest Products NAICS Wood Preservation Stock Overview Price as at 11/10/2016 $41.93 12-mo Target Price $56.55 52-wk Price Range $39 - $54 Beta 0.35 Market Cap $2.88B Shares O/S $29.27M Profitability & Yield ROE 18.2% ROA 9.1% Profit Margin 13.7% Diluted EPS (ttm) 2.43 Payout Ratio 15.62 Dividend per share 0.32 Dividend Yield 0.91% Valuation Price/Earnings (ttm) 17.5 Price/Sales 1.6 Price/Book (ttm) 2.94 EV/EBITDA (ttm) 12.6 *data retrieved from Bloomberg Terminal

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Business Description Stella-Jones Inc. ("Stella-Jones" or the "Company") was founded in 1992 and is a leading Canadian manufacturer of pressure treated industrial wood products, with a network of 34 wood treating facilities spread across 16 U.S. states and 5 Canadian provinces. The Company supplies North America's railroad operators with railway ties and timbers, and the continent's electrical utilities and telecommunication companies with utility poles. Stella-Jones also manufactures and distributes residential lumber and accessories to retailers for outdoor applications, as well as industrial products for construction and marine applications.

Investment Summary and Recommendation We issue a BUY recommendation on Stella Jones with a 12-month target price of $56.55 per share with a projected total return of 34.96% from its current price of $41.90. Our target price is calculated using a discounted projected free cash flow model to arrive at an implied share price. Our recommendation is driven by our observation of double digit revenue growth for the next 4 years (24% for 2017 forecast) and stable/consistent operating and net profit margin observed over the last 5 years. In 2015, Stella-Jones earned the highest revenues and net income in its history while continuing to position itself for future growth. The Company’s continental production network once again expanded through strategic acquisitions, thus enhancing its already well-established role as a leading source and reliable supplier of treated wood products Cautious Optimistic Outlook on Rail Way Ties In Q2 2016, Railway ties sales amounted to $216.3 million, up 11.1% from $194.8 million last year. Excluding the currency conversion effect, railway tie sales rose approximately 7.3%. While we had remained skeptical given 15% CAPEX cuts in railway tie end market, the company delivered with another quarter of robust growth. Management expects second-half 2016 demand for railway ties to be down on a year-over-year basis but revenue growth compression should be offset by Stella-Jones’ broader reach in the residential lumber category allowing for continued benefit from steadily increasing demand for new construction and outdoor renovation projects in the North American residential and commercial markets. Revenue growth from robust residential and non-pole log growth Towards the end of 2015, Stella-Jones enlarged its procurement department to support residential lumber requirements. These lumber sales, along with non-pole-quality log sales, make up the logs and lumber product category. In Q2 2016, sales of residential lumber totalled $152.1 million, up from $60.9 million last year. This strong increase reflects sales of $51.7 million from the Ram acquisition, increased market demand as well as the impact of the transition from treating services only for wholesalers to a value-added full service direct offering for retailers. Strong and consistent profit margins EBITDA Margins in Q2 2016 came in at 16% ahead of management guidance of 15-15.5%. Estimated EBITDA for 2016 has been revised to a conservative 15.7% projected revenues given a 5-year historical average margin 15.6% and expected positive impact of increased revenues through strong residential lumber sales figures. Depressed market prices act as a value investment opportunity Year-to-date returns on SJ.TO is currently hovering at -12.4% largely due to an expected decline in revenue from rail tie purchases. Rail tie purchase decline can be attributed to a decrease in capex of class 1 railway companies, freight transport recession stemming from historical lows in oil prices and production and record inventory levels. However, we note that Class 1 customers purchase 70% of SJ ties and do so via contracts that span 3-5 years, thereby offering some downside protection. Furthermore, Stella Jones management has continued to diversify revenue growth through acquisitions, the impact of which can be seen in the increased growth in revenue from the residential lumber markets in Q2 2016. We expect that the market has priced in the slow demand for residential ties but will continue to determine the impact of increased revenue from residential lumber and non-pole treated wood, leading to a gradual but steady increase in SJ’s price over the next 12 months.


Macro-economic Backdrop Forecasts suggest that in the long run the Canadian Dollar, relative to the US dollar, is poised to remain on par with current exchange rate levels which sit at approximately 0.70-0.75. However, this could be affected in the short term by the FOMC’s decision to hike or hold the federal fund rate and OPEC’s decision to freeze oil output. Inflation is expected to remain around the 2% mark in Canada and the US and with slowing economic growth in Canada rates are expected to remain at historical lows. The overnight lending rate is expected to remain 0.50 percent with no foreseeable talks on raising it. In the US, the Federal Reserve is likely to hold interest rates steady at 0.50 in the face of weaker than expected economic data on growth and unemployment. However, the prospect of a rate increase in the near term persists. Average annual real GDP growth in Canada is expected to reach 2.4% in 2017, driven largely by resumption of oil production and reconstruction post Alberta blaze, then levelling off thereafter at 2%. Similar growth rates are forecasted for the US economy while the Global Economy is expected to trend along at 3% for next 2-3 years. Past trends suggest unemployment will continue to hover around the target 7% mark in Canada with job creation and losses having a near net effect on the overall unemployment. In the US, unemployment sits around 5% however concerns of significant long term unemployment and marginal wage growth underlie the ability of the US to maintain this rate going forward.

Industry Analysis and Competitive Positioning Pressure treated wood products fall under wood preservation business, which is categorized under wood product manufacturing industry, with reported revenue of $26 Billion in 2015. Even though wood reservation contributes only 3% to the industry (Figure 1), they share the same seasonal cycle (Figure 2).

Demand Drivers Continued U.S. Economy growth, yet not enough infrastructure investment The wood preservation industry is expected to benefit from US economic recovery. GDP is expected to increase 2% year over year, resulting in an increase in infrastructure investment. However, cost estimates for modernizing could be as high as $2.3 trillion over the next decade for transportation, energy, and water infrastructure.

Energy Depression puts downward pressure on railway ties maintenance budget As oil price maintain historic lows, transportation and rail freight industries are suffering from much lower cargo volume resulting in lower revenues and compressed margins. In 2015, Class 1 railroad total traffic decreased by 6.1% mainly affected by 12% decrease in coal and metals, and 3% decrease in chemicals. These three categories represent 60% of carloads and 3% of total

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Wood product manufacturing: Total Wood Preservation


traffic. As a result, Class 1 Railway companies have largely revised capital expenditures lower. It is expected that a lower CAPEX budget in Class 1 Railway companies will put downward pressure on the pricing power of railway tie manufacturers. Weak CDN exchange rate in favor of Canadian Manufacturers Forecasts suggest that the Canadian Dollar, relative to the US dollar, is poised to remain steady at current exchange rate levels of 0.70-0.75 CAD/USD. Stella Jones revenue currency is USD but the company reports in CAD and has therefore benefited from favorable exchange rates and may likely to do so if rates remain consistent. Strong residential lumber sector growth backed by increasing Household Disposable Income and Housing Starts U.S. housing market and household consumption continues to grow as a result of low interest rate environments. The steady growth of those two indicators indirectly increase demand for residential lumbers. As housing starts continue to steadily increase we expect this momentum to continue with organic growth opportunities for the residential lumber sector the highest among wood preservation industry.

Competitive Positioning As per management, Stella-Jones has positioned itself to grow through a two-pronged approach – focusing on operational efficiencies to promote organic growth, and expand through strategic acquisition in the core railway tie and utility pole categories.

Based on Porter’s Five Analysis (Figure 5), the industry’s strongest threats are Bargaining Power of Customers and Threat of Substitutes. Customers in wood preservation industry are concentrated, and volume based. Stella-Jones is

dependent on major customers for a significant portion of its sales, and the loss of one or more of its major customers could result in a significant reduction in its profitability. The industry is also facing a rising threat of substitutes as technology advances. Concrete and Steel railway ties and utility poles were widely adopted in Europe and Asia. Even though studies have shown that the total energy requirements to extract, produce, and use wood products are less than steel and concrete over a lifetime of use, the industry should still look out for any regulation changes and technology innovations that may be in favor of the substitutes.

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Figure 5. Porter's Five Forces Analysis


Organic Growth Internally, Management maintains a focus on continuous operational improvements, which includes containing overhead costs, maximizing plant specialization and benefiting from the economies of scale of a larger organization. The Company continues to expand upon its strong supplier relationships and the long-term customer relationships it has built in its core markets. Strategic Expansion As a market leader with a solid financial footing, Stella-Jones has been proactive as an industry consolidator in its core railway tie and utility pole markets. This has resulted in substantial increases in sales and net earnings, stronger supply and distribution networks, improved product and service offerings and a more significant presence in the United States. Acquisition opportunities are considered based upon Management's stringent investment criteria. Overall, Stella-Jones anticipates still greater possibilities in its traditional marketplace and steadily increasing participation in untapped markets.

Financials

Stella Jones has maintained a double digit annual revenue growth over the last 5 years. Attributable to revenue growth in residential lumber, industrial and non-utilities pole segment sales which has hedged the depression in profit margins due to the decrease in capex spending in class 1 railway companies and it’s impact on rail way ties sales. Revenue growth has consistently meet or exceeded peer group average. Projected revenues for 2016 are estimated to meet a 24% YOY change in line with analyst expectations and management guidance.

An analysis of ROE shows that Stella Jones has maintained an ROE between 15- 20% in the last 5 years and based on our model forecast should hit an ROE of 17% for 2017. ROE has consistently been over the peer group average as observed in the trend line in the Figure 8. Projected ROE is supported by consistent gross and EBITDA margins with historical 5-year averages of 19.53% and 15.57% respectively which has also been above the peer group average during the same time period.

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Figure 6. Revenue Growth (5yr - CAGR SJ vs Peer Group)

Stella Jones InterforConifex Western Forest ProductsWest Fraser Timber Peer Average

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Figure 7. ROE (SJ vs Peer Group)

Stella Jones Interfor

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Valuation and DCF Assumptions We valued Stella Jones Inc. with a Discounted Free Cash Flow to Firm (“DCF”) model. The DCF model used historical financials, valuing with a combination of the present value of the unlevered free cash flows and the present value of the terminal year value. In the determination of forecasted free cash flows, revenue was projected to grow at 24%, 20%, 18% and 12% for the next four years and then assumed to fall to 5% for years 5, 6 and terminal. Gross, EBITDA and EBIT were determined to be 19.53%, 15.7% and 14.17% which were determined based on the average of historical margins over the last 5 years, as we observed historical margins remained fairly stable during the last the 5 years Projected debt was assumed within the management disclosed covenant of 3.5x EBITDA with sufficient margin of safety and interest payments were determined as the lesser of current blended interest rates (yields on notes payable) or 7.81% of EBIT (based in a historical average EBIT/Interest of 12.8x) as this too had remained consistent over the last 5 years Capital expenditures was maintained at 35.82% for the next 3 years reflective of the historical YOY growth average for the last 5 years and given the companies combination of growth through organic and acquisitions. Capex was then dropped to 10% in 2020 and then 5% in the years following. These forecast and assumptions are based on current low inflation and interest rate economic environment as noted above and can be subject to significant changes as determined by management and the Board of Directors Based on model projections, the present value for unlevered free cash flow was determined to be $286M, EV was determined to be $4.64B and the target share price was determined to be $56.55/share representing an upside of 24.5%


Figure 8. Forecasted Income Statements

WACC was calculated based on CAPM for cost of equity and a blended interest rates on all outstanding Stella Jones notes payable. The risk free rate used was 1.6% reflecting 30-year Government of Canada Bond yields and Beta was determined to be 0.4. The base case for WACC was determined at 6.5% and the base case of terminal value growth rate was determined to be 2% or inflation. Figure 9. DCF Valuation

Valuation Summary Bear Base Bull

WACC 7.00% 6.50% 6.00%

Terminal Growth 1.00% 2.00% 2.00%

PV of Cash Flows (MM) 277 286 294

PV of Terminal Year (MM) 3,201 4,359 5,009

Enterprise Value (MM) $3,478 $4,644 $5,303

Less Net Debt (June 2016) 731 731 731

Equity Value (MM) $2,747 $3,913 $4,572

Shares O/S (MM) - 09/21/2016 69.20 69.20 69.20

Equity Value per Share $39.70 $56.55 $66.07

Current Price 45.39 45.39 45.39

Upside/Downside -12.54% 24.59% 45.55%


Investment Risks Interest Rate Risk Given a probable increase in the federal fund rate in the near term, the interest rate risk of Stella Jones is perceived to be medium. A signification portion of Stella Jones’s operations is conducted in the US; likewise, its debt exposure to the US market is also significant with ~ 24% of its long-term debt based on variable rate. An increase in the interest rate could substantially drive up the debt service obligation of the company which can in turn materially affect its profitability. To offset this risk, the company enters into interest rate swaps to reduce the impact of fluctuating interest rates on its long-term debt. However, this does not guarantee the company a complete hedge. Liquidity Risk We believe the liquidity risk of Stella Jones is moderate. As at June 30, 2016, the Company was in full compliance with its debt covenants and contractual obligations. However upcoming additional demand for loan facilities see the company nearing the cap of its revolving credit facility of (US$575.0 million). This is largely being triggered by an increase in accounts receivables stemming from increased sales and the acquisition of a number of smaller firms. Management considers that all recorded receivables are fully collectible as major customers, mainly Class 1 railroad operators, large retailers and large-scale utility service providers, have good credit standing and limited history of default. Business Market Conditions YTD declines in Class 1 Railway Company Capex spending for 2016 has led to decline in demand for Railway ties leading to an increase in year over year inventory levels and a decrease in purchases. According to the Rail Ties Association, the weakness in the global economy is expected to continue and therefore weakness in the commodities markets and U.S. manufacturing sector may continue. Despite these headwinds, the U.S. economy should grow by 2.4 percent leading to rail pricing stability across the sector. However, greater world economic weakness or further direct or indirect currency manipulations, affecting U.S. GDP growth to a more significant degree than expected, could present a further drag on tie demand.

Figure 10. Forecasted Base Case Tie Demand (2017) Source: Rail Ties Association

Product Substitution According to Dr. Allan M. Zarembsk in consultation to the RTA, while concrete tie designs have been around for many years, it has only been in the last two decades that their performance has been deemed to be adequate to withstand the severe loading environment of North American freight operations. Syudies funded by The National Precast Concrete Association (NPCA) have shown that previously cited issues with concrete ties such as environmental emissions, maintainence/replacement cost of existing wood ties and estimated life span of concrete rail ties have been subject to new research that show at least partialy feasibility and justification for a move to concrete from treated wood rail ties. However tlarge scale product subsitiution is not of immediate concern as market penetration of concrete rail ties hovers around 6.5% according to the RTA.


Figure 11. Stella Jones Risk Matrix


APPENDIX APPENDIX I - RATIO ANALYSIS Stella Jones 2011 2012 2013 2014 2015

Activity Ratios Inventory turnover 2.3x 1.7x 1.9x 2.0x 1.9x

Working capital turnover 2.8x 2.0x 2.1x 2.2x 2.1x Fixed asset turnover 5.7x 4.7x 4.8x 4.8x 4.7x

Total asset turnover 1.1x 0.9x 1.0x 1.1x 1.0x

Liquidity Ratios Current ratio 5.8x 5.9x 9.0x 8.5x 6.4x

Quick ratio 1.4x 1.2x 1.7x 1.6x 1.1x

Cash ratio 0.0x 0.2x 0.0x 0.0x 0.0x

Profitability Ratios Gross profit margin 19.5% 21.2% 19.5% 17.9% 19.7%

Operating income margin 14.3% 15.8% 14.0% 12.6% 14.2%

Net profit margin 8.7% 10.2% 9.2% 8.3% 9.1%

ROA 10.1% 9.0% 8.7% 8.3% 9.0%

ROE 18.2% 18.3% 17.8% 16.4% 17.6%

Return on common equity 18.2% 18.3% 17.8% 16.4% 17.6%

Solvency Ratios Debt-to-assets ratio 29.9% 38.2% 34.9% 34.6% 37.7%

Debt-to-equity ratio 55.5% 78.0% 65.4% 64.3% 73.4%

Financial leverage ratio 1.9x 2.0x 1.9x 1.9x 1.9x


APPENDIX II – PRICE TO BOOK

APPENDIX III – PRICE TO EARNINGS

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Interfor Corporation Western Forest Products Inc. West Fraser Timber Co. Ltd.


APPENDX IV – Return on Assets

APPENDIX V – Unlevered Free Cash Flows

(10.0%)

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Stella Jones Interfor Conifex Western Forest Products West Fraser Timber Peer Average

Stella Jones CorporationUnlevered Free Cash Flow Schedule

($ Millions)Projected

2016 2017 2018 2019 2020 2021 2022 TerminalUnlevered Free Cash Flow

EBIT (1-t) 192.0 238.1 285.7 337.1 377.6 396.5 416.3 437.1Depreciation 29.0 36.0 43.2 51.0 57.1 60.0 63.0 66.12Changes in working capital (248.0) (276.5) (282.5) (305.1) (233.9) (118.1) (117.6) (123.5)CAPEX (50.8) (69.0) (93.7) (103.1) (108.2) (113.6) (119.3) (119.3)Unlevered Free Cash Flow (DCF Valuation) ($77.8) ($71.4) ($47.3) ($20.1) $92.6 $224.7 $242.3 $260.4

CHECK CALCULATION ON UFCF

Unlevered Free Cash FlowNet Income 177.0 219.5 263.4 310.8 348.0 365.5 383.7 402.9Depreciation 29.0 36.0 43.2 51.0 57.1 60.0 63.0 66.1Interest Expense 21.5 26.6 31.9 37.7 42.2 44.3 46.5 48.8Tax Shelter on Interest Expense (6.4) (8.0) (9.6) (11.3) (12.7) (13.3) (14.0) (14.7)Changes in working capital (248.0) (276.5) (282.5) (305.1) (233.9) (118.1) (117.6) (123.5)CAPEX (50.8) (69.0) (93.7) (103.1) (108.2) (113.6) (119.3) (119.3)Unlevered Free Cash Flow (77.8) (71.4) (47.3) (20.1) 92.6 224.7 242.3 260.4

Check 0.000 0.000 0.000 (0.000) 0.000 0.000 0.000 0.000


APPENDIX VI – Margin Comparison (Historical 5 yr. SJ vs Peers)


APPENDIX VII – FINANCIAL PROJECTION

Stella Jones CorporationCash Flow Statement

(C$ Millions)Projected

2015A 2016E 2017F 2018F 2019F 2020F 2021F 2022F Terminal

Net Income (Cash Flow) $141.3 $177.0 $219.5 $263.4 $310.8 $348.0 $365.5 $383.7 $402.9

Depreciation, Depletion, Amortization $23.3 $29.0 $36.0 $43.2 $51.0 $57.1 $60.0 $63.0 $66.1

Net Increase(decrease) in Working Capital ($169.3) ($248.0) ($276.5) ($282.5) ($305.1) ($233.9) ($118.1) ($117.6) ($123.5)

Other Adjustments - Net (change in taxes) $0.1 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Net Cash from (used by) Operating Act ($4.7) ($42.0) ($21.0) $24.1 $56.6 $171.3 $307.3 $329.1 $345.5

Projected Capex ($37.4) ($50.8) ($69.0) ($93.7) ($103.1) ($108.2) ($113.6) ($119.3) ($119.3)

Cash Acquisitions ($62.6) ($113.1) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Net Cash from (used by) Invesment Act. ($100.0) ($163.9) ($69.0) ($93.7) ($103.1) ($108.2) ($113.6) ($119.3) ($119.3)

Issuance (purchase) of Equity Shares $2.11 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Issuance (repayment) of Debt Securities $117.39 ($73.87) ($91.74) ($100.18) ($108.55) ($106.95) ($92.53) ($76.74) ($92.94)

Net Change in Revolver $0.00 $124.58 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Payment of Dividends & Other Cash ($22.08) ($26.55) ($32.92) ($39.50) ($46.61) ($52.21) ($54.82) ($57.56) ($60.44)

Other Cash from (used by) Financing $0.88 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Net Cash from (used by) Financing Act. $98.30 $24.16 ($124.66) ($139.68) ($155.16) ($159.16) ($147.35) ($134.30) ($153.37)

Net Change in Cash & Cash Equivalents ($6.40) ($181.75) ($214.69) ($209.33) ($201.60) ($96.13) $46.30 $75.46 $72.84

Stella Jones CorporationWorking Capital Schedule

Days per year 366.00 365.00 365.00 365.00 366.00 365.00 365.00 365.00Projected

(C$ Millions) 2015A 2016E 2017F 2018F 2019F 2020F 2021F 2022F Terminal

Receivables $159.0 $196.9 $244.8 $293.8 $346.6 $387.2 $407.6 $428.0 $449.4

Payables $75.0 $50.1 $62.3 $74.7 $88.2 $98.5 $103.7 $108.9 $114.3

Inventory $804.0 $989.3 $1,230.0 $1,476.0 $1,741.7 $1,945.4 $2,048.3 $2,150.7 $2,258.2

Other $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Net Working Capital $888.0 $1,136.0 $1,412.6 $1,695.1 $2,000.2 $2,234.1 $2,352.2 $2,469.8 $2,593.3

Change in Working Capital ($248.0) ($276.5) ($282.5) ($305.1) ($233.9) ($118.1) ($117.6) ($123.5)

Stella Jones CorporationBalance Sheet

(C$ Millions)Projected

2015A 2016E 2017F 2018F 2019F 2020F 2021F 2022F

ASSETSCash $42.9 $42.9 $42.9 $42.9 $42.9 $42.9 $42.9 $42.9 Restricted cash Accounts Receivable $196.9 $244.8 $293.8 $346.6 $387.2 $407.6 $428.0Inventory $989.3 $1,230.0 $1,476.0 $1,741.7 $1,945.4 $2,048.3 $2,150.7Other $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0Total Current Assets $1,229.1 $1,517.8 $1,812.7 $2,131.3 $2,375.5 $2,498.8 $2,621.6

Net PP&E $375.0 $412.4 $427.2 $453.0 $495.7 $541.6 $589.9 $640.6Goodwill $285.3 $285.3 $285.3 $285.3 $285.3 $285.3 $285.3Other $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0Total Assets $1,926.7 $2,230.2 $2,550.9 $2,912.2 $3,202.4 $3,374.0 $3,547.4

LIABILITIES AND EQUITYAccounts Payable $50.1 $62.3 $74.7 $88.2 $98.5 $103.7 $108.9Accrued Liabilties $74.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0Total Current Liabilities $124.1 $62.3 $74.7 $88.2 $98.5 $103.7 $108.9

Senior Secured Term Debt $738.7 $917.4 $1,001.8 $1,085.5 $1,069.5 $925.3 $767.4 Includes revolvi Total Long Term Liabilities $738.7 $917.4 $1,001.8 $1,085.5 $1,069.5 $925.3 $767.4

Total Liabilities $862.8 $979.7 $1,076.5 $1,173.7 $1,168.0 $1,029.0 $876.3

Common Shares $913.5 $1,064.0 $1,250.5 $1,474.3 $1,738.5 $2,034.3 $2,345.0Retained Earnings $150.4 $186.5 $223.9 $264.1 $295.8 $310.6 $326.2Shareholder's Equity $1,064.0 $1,250.5 $1,474.3 $1,738.5 $2,034.3 $2,345.0 $2,671.1

Total Liabilities and Equity $1,926.7 $2,230.2 $2,550.9 $2,912.2 $3,202.3 $3,374.0 $3,547.4

Check (0.0) (0.0) 0.0 0.0 0.0 0.0 0.0

Stella Jones CorporationKey Ratios and Covenants

Projected2016E 2017F 2018F 2019F 2020F 2021F 2022F

EBITDA (C$ MM) $376.1 $451.4 $532.6 $596.5 $626.3 $657.7 $690.5Capital Expenditures (C$ MM) $50.8 $69.0 $93.7 $103.1 $108.2 $113.6 $119.3Total Debt (C$ MM) $738.7 $917.4 $1,001.8 $1,085.5 $1,069.5 $925.3 $767.4Net Debt (C$ MM) $695.8 $874.5 $958.9 $1,042.6 $1,026.6 $882.4 $724.5Interest Expense (C$ MM) $21.5 $26.6 $31.9 $37.7 $42.2 $44.3 $46.5Total Book Capitalizat(C$ MM) $1,759.7 $2,125.0 $2,433.2 $2,781.1 $3,060.9 $3,227.3 $3,395.6

Net Debt / EBITDA Covenant < 3.5 x 1.8 x 1.9 x 1.8 x 1.7 x 1.6 x 1.3 x 1.0 x EBITDA Cushion

Interest Coverage (EBITDA / Inte Covenant 17.5 x 17.0 x 16.7 x 15.8 x 14.8 x 14.8 x 14.8 x EBITDA Cushion

Interest Coverage ((EBITDA - CAP Covenant 15.2 x 14.4 x 13.7 x 13.1 x 12.3 x 12.3 x 12.3 x EBITDA Cushion

Net Debt / Capitalization Covenant < 50.0% 39.5% 41.2% 39.4% 37.5% 33.5% 27.3% 21.3%


Disclosures About Queen’s MFin Portfolio Management Group

Queen’s Master of Finance Portfolio Management Group (PMG) seeks to invest a portion of the Queen’s endowment. We aim to reinvest our investment proceeds to benefit the Queen’s MFin program and PMG. Furthermore, a large part of the program is relevant to investment management and we believe PMG offers an excellent platform for transition to real-life application.

The purpose of our fund is to not only bridge the gap between the classroom and practical application, but we also seek to cultivate investment intuition and entrepreneurial instincts in our members while refining leadership and collaboration skills as well. The fund is directed by students and recent graduates in its entirety.

While our long-term investments follow a value-oriented selection process, we may also employ a macro-tactical framework to capitalize on short-term opportunities. Our Annual Investment Outlook helps provide direction for the latter approach, whereas the former is driven partly via fundamental analysis, sector-specific focus and the Annual Investment Outlook.

Queen’s MFin Portfolio Management Group Disclaimer

Queen’s MFin PMG is an independent investment research student-run organization. Queen’s MFin PMG is not a

registered broker dealer and does not have investment banking operations. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this report constitutes individual investment, legal or tax advice. Queen’s MFin PMG shall accept no liability for any loss arising from the use of this report, nor shall Queen’s MFin PMG treat all recipients of this report as customers simply by virtue of their receipt of this material. Investments involve risk and an investor may incur either profits or losses. Past performance should not be taken as an indication or guarantee of future performance. Queen’s MFin PMG executives, analysts, and/or members may from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research. The information contained in this research report is produced and copyrighted by Queen’s MFin PMG. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Queen’s MFin PMG.

Stella Jones Inc. (SJ-T) · Stella-Jones Inc. ("Stella-Jones" or the "Company") was founded in 1992...

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Transcript of Stella Jones Inc. (SJ-T) · Stella-Jones Inc. ("Stella-Jones" or the "Company") was founded in 1992...