On today’s TSX Breakouts report, there are 15 stocks on the positive breakouts list (stocks with positive price momentum), and 38 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a newly listed dividend stock whose share price has shown resilience during times of market turbulence this year. For instance, the share price inched higher on Monday while the S&P/TSX composite index tumbled 266 points, or 1.6 per cent. The stock may surface on the positive breakouts list in the near future if analysts’ expectations are correct. Analysts are forecasting the stock to deliver a total return (including the dividend yield) of 23 per cent over the next year.
The stock pays its shareholders an attractive yield of 4.3 per cent. The security highlighted today is Pinnacle Renewable Holdings Inc. (PL-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Richmond, B.C.-based Pinnacle is the third largest industrial wood pellet manufacturer worldwide operating seven facilities in western Canada with a upcoming plant that is currently under construction located in Smithers, B.C.
Of note are its Entwistle facility in Alberta and its Smithers plant in B.C.. On March 8, initial production began at its Entwistle facility. Management anticipates to complete the commissioning phase of this facility in the second quarter with production slowly ramping up. At its Smithers facility, where it has a partnership with West Fraser Timber Co. Limited who has a 30 per cent interest, production is slated to begin in the fourth quarter of this year. The company has a cost advantage with its costs in the lowest quartile. The top three manufacturers are expected to supply roughly one-third of the global market by 2019.
Industrial wood pellets are used by utility companies to produce renewable fuel for electricity generation. The wood pellet market is experiencing strong demand driven by carbon reduction regulations and a transition to renewable energy. According to a report from market consultant Hawkins Wright, demand for industrial wood pellets grew at a compound annual growth rate (CAGR) of 11 per cent between 2013 and 2016 and is expected to grow at a 18 per cent CAGR through to 2021.
The company has an attractive growth profile. Revenue was reported at $201-million in 2014, $226-million in 2015, $266-million in 2016 and $293-million in 2017 and Pinnacle appears to be on track for further top line growth. The consensus revenue estimates are $352-million in 2018 and $407-million in 2019. On May 22, the company announced its fourth contract win so far this year, this time with a trading company based out of Japan, Hanwa Co. Limited. Pinnacle will begin supplying Hanwa with industrial wood pellets in early 2022. As at June 1, the company’s backlog, a measure of future revenue, stood at $3.6-billion.
The company has strong earnings visibility given that has long-term take-or-pay contracts with major utilities in Europe and Asia, the weighted average supply agreement term is approximately seven years. As indicted in the prospectus issued earlier this month, the company said, “We have entered into long-term take-or-pay contracts with our customers, whereby the buyer has a firm obligation to purchase a fixed quantity of product at specific prices that represent 104 per cent of our production capacity through 2021 and nearly 87 per cent of our production capacity through 2026, on an aggregated basis, including new production capacity from the Entwistle and Smithers Facilities.”
ONCAP Entities is the company’s largest shareholder and with the recent secondary offering announced earlier this month is reducing its ownership position to approximately 33 per cent of the shares outstanding.
The stock began trading on the Toronto Stock Exchange on Feb. 22, and the initial public offering price was $11.25.
Dividend policy
The company’s inaugural dividend was 9 cents per share for the period starting on February 6 and extending to March 30, it was not a full quarter given that the stock was just listed in February. Going forward, the quarterly dividend will be 15 cents per share or 60 cents per share yearly. This equates to an annualized dividend yield of 4.3 per cent.
Analysts’ recommendations
There are four analysts that cover this small-cap stock with a market capitalization of $462-million, two are currently restricted on the stock given the recent secondary offering. However, prior to the offering, three analysts had buy recommendations and one analyst had a ‘market perform’ recommendation (the analyst from BMO Capital Markets).
The stock is covered by four large financial firms: BMO Capital Markets, CIBC Capital Markets, RBC Capital Markets and Scotia Capital.
Financial forecasts
The consensus EBITDA estimates are $62-million in 2018, rising 26 per cent to $78-million in 2019. The Street is anticipating earnings per share of 35 cents in 2018, rising to 89 cents in 2019.
According to the company’s investor presentation released in May, management expects adjusted EBITDA to be between $77-million and $81-million in 2019.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 9 times the 2019 consensus estimate.
The consensus one-year target price that is based on two analysts’ calls is $16.63 (the analysts at BMO Capital Markets and CIBC Capital Markets are currently restricted), implying the share price has 18 per cent upside potential over the next 12 months, and including the dividend yield, the stock has a potential total return of nearly 23 per cent.
Nelson Ng, the analyst at RBC Capital Markets, has a target price of $17. Benoit Laprade from Scotia Capital has a target price of $16.25. Prior to being restricted on the stock due to the secondary offering, Mark Jarvi, the analyst from CIBC Capital Markets, had a target price of $17, which he raised at the beginning of June from $16. Lastly, prior to being restricted, Jonathan Lamers from BMO Capital Markets had a target price of $16.
Chart watch
Technical analysis is limited given that the stock has only been trading on the Toronto Stock Exchange since Feb. 22.
Since the beginning of March, the share price have been trading principally between $13.50 and $14.50.
Liquidity can be low with a limited public float. The three-month daily average trading volume is approximately 75,000 shares.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
Jennifer Dowty