A new bioenergy plant and a more promising U.S. housing market should help resurrect the share price of small-cap lumber company Conifex Timber Inc., analysts say.
Shares of Vancouver-based Conifex, which operates two sawmills in northeastern British Columbia, have been lagging their larger industry peers since the company went public in 2010.
Conifex has been working to improve the productivity of its mills, which were bought out of bankruptcy from two separate companies between 2008 and 2010, when the forestry sector was devastated by the U.S. housing crisis.
The company also experienced a financing delay last year in the startup of its 36-megawatt bioenergy plant in Mackenzie, B.C. The plant will produce energy using waste from both its sawmill and timber harvest operations. A subdued level of home construction earlier this year in the United States, blamed on severe weather, has also weighed on Conifex stock more than its peers because of its smaller size, analysts say.
But most analysts see better days ahead as U.S. housing activity picks up, alongside growth in other key markets such as China and Japan. Conifex is also set to flip the switch later this month on its power generation project, which gives it a new and stable source of revenue. The company is also eyeing an expansion of its Mackenzie sawmill operations.
"If they can deliver on what they're working on, the valuation still looks pretty compelling," said CIBC World Markets analyst Mark Kennedy, who has a "sector outperformer" on the stock and a $13 price target.
Mr. Kennedy is one of five analysts with a "buy" or equivalent rating on the stock, while one says "hold," according to S&P Capital IQ. The consensus price target for Conifex over the next year is $11.88, which is about 40 per cent higher than where the stock is now trading.
The shares hit a 52-week high of $9.75 in late February, but then slid amid the slowdown in U.S. housing activity earlier this year.
Conifex graduated to the TSX from the TSX Venture Exchange in May and has regained momentum in recent months due in part to the brightening U.S. housing picture.
About 49 per cent of the company's revenue came from U.S. lumber sales in the first six months of the year, while 29 per cent of its sales was generated in China. The balance of Conifer's revenue during that period came from Canadian and Japanese markets – 13 per cent and 9 per cent, respectively.
The bioenergy plant is expected to generate about $14-million in annual earnings before interest, taxes, depreciation and amortization. (The company's EBITDA in 2013 was $21.7-million.) Conifex also has a 20-year agreement to supply energy from the plant to B.C. Hydro.
"The power project coming on stream really changes the complexion of our company," said Conifex chief executive Ken Shields. The company doesn't currently pay a dividend, but Mr. Shields said the board will consider it once the power project begins operating.
RBC Dominion Securities analyst Paul Quinn has a $14 target on the stock believing "much of the company's growing pains are behind it."
In a recent note, he predicted the U.S. housing market "is in the early days of a gradual recovery" and said Conifex has made "substantial inroads" into the growing Asian market.
Rupert Merer, an analyst at National Bank Financial, said Conifex has a cheaper valuation than its industry peers today. He expects it to begin trading at a higher multiple after its bioenergy plant starts, citing the higher valuations of independent power producers with steady cash flow.
"That should lower the risk on Conifex," said Mr. Merer, who has an $11.50 target on the stock.
TD Securities analyst Sean Steuart is the lone "hold" on Conifex with a $9 price target, citing "a relatively high degree of execution risk," especially with the potential expansion of its Mackenzie sawmill operations.
"We believe that the company's relative valuation discount is appropriate," Mr. Steuart said in a note.