What are we looking for?
An attractive long-term prospect in Canada’s other resource sector.
Canada’s economy is still very dependent on natural resources. This has been a growing cause of concern as the long-term value of domestic oil and gas assets could be severely impaired, depending on what the transition to a greener economy will look like. However, Canada is blessed with an abundance of other natural resources, and one in particular – timber – may be overlooked in the context of this transition.
According to the International Energy Agency, the construction and operation of buildings consume 36 per cent of the world’s energy and are responsible for 40 per cent of energy-related emissions. Governments across the world have implemented “nearly zero-energy” standards for new buildings while many others are following – and timber may be a big part of the answer.
The production of cement and steel account for 6 per cent and 8 per cent of global emissions, respectively. While the oil industry is able, and has already begun, to invest in carbon capture and storage technology, this appears to not be a viable option for cement. (According to McKinsey & Co., carbon capture costs approximately US$20 per tonne of CO2 for oil production, but as much as US$200 per tonne of CO2 for cement.) Wooden laminate beams, meanwhile, are of comparable strength to steel but require less than one-sixth of the energy to produce. And a wooden window frame provides more than 400 times the insulation of one made of steel.
All of this could make timber an even more precious resource, and we will look at companies across the world to see which are poised to benefit from this potential shift in raw building-material demand. Our universe is all companies in the Thomson Reuters Business Classification (TRBC) Forest & Wood Products industry. The accompanying table specifically references TBRC Activity, which is more granular and thus gives a better picture of the business or businesses the company is in.
- First, we look for companies that are growing and would have the capacity to meet increased demand. We look at three-year revenue growth and require at least a 10-per-cent increase.
- Next, we look for companies that are planning for this potential shift. As a proxy for this, we use the Refinitiv environmental, social and governance (ESG) database and screen for only those companies whose management has explicitly stated that it is aware of climate change as a commercial risk and/or opportunity for their business.
- Finally, we look for companies that are growing profitably and screen for those whose net profit margin is greater than 5 per cent.
More about Refinitiv
Refinitiv, formerly the financial and risk business of Thomson Reuters, is one of the largest providers of financial markets data and infrastructure, serving more than 40,000 institutions worldwide. Refinitiv’s ESG data cover more than 70 per cent of the world’s public companies in terms of global market capitalization, using more than 400 metrics.
What we found
The screen yielded only four companies and, encouragingly, three of them are Canadian. While all three have experienced poor stock performance over the past year, some of this may be because of external factors such as the CN Rail strike rather than the long-term prospects of the timber industry. Indeed, long-term investors interested in this sector may find this an opportune time to buy. Timber futures climbed more than 20 per cent over the past year; Raymond James predicts they will rise roughly another 7 per cent in 2020, to US$420.
Investors are advised to do their own research before trading in any of the securities shown below.
Hugh Smith, CFA, MBA is director of Refinitiv’s ESG and investment management business for the Americas, and is a director on the board of the Responsible Investment Association.
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