DBRS Morningstar Confirms CanWel Building Materials Group Ltd. at B (high) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Notes (the Notes) rating of CanWel Building Materials Group Ltd. (CanWel or the Company) at B (high) with Stable trends. DBRS Morningstar also confirmed the Recovery Rating for the Notes at RR4. The confirmation is based on DBRS Morningstar’s expectation that the downward pressure on CanWel’s earnings following a meaningful decline in construction material pricing during the last twelve months ended Jun 30, 2019 (LTM 2019), will start to alleviate in the second half of 2019 (H2 2019). CanWel’s ratings continue to be supported by its well-established market positions, diversified customer and supplier bases and relatively high barriers to entry. The ratings also reflect the significant cyclicality and seasonality associated with the building materials industry, the intense competition and the Company’s high dividend payout.

DBRS Morningstar expects the negative pressure on CanWel’s earnings to alleviate over the near term as construction material pricing stabilizes. Absent further acquisitions, CanWel’s revenues should continue to grow to the approximately $1.3 billion level in 2019, primarily driven by the acquisition of Lignum Forest Products. Over the near to medium term, DBRS Morningstar expects the Company’s revenues to grow in the low single digits per year toward $1.4 billion, benefitting from ongoing tailwinds from the U.S. housing market. EBITDA margins should improve modestly over the near term, as commodity prices are expected to stabilize following a pickup in construction activity and supply curtailments. As such, DBRS Morningstar expects CanWel’s EBITDA (on a pre-IFRS 16 basis) to stabilize above $60 million for the full-year 2019 and return to the $70 million level in 2020.

DBRS Morningstar believes CanWel’s credit metrics should improve over the near term in line with a recovery in earnings. Cash flow from operations should track operating income and be in the $40 million to $50 million range in 2019 and 2020. Capex is expected to decrease modestly and be approximately $5 million in 2019 and 2020, while cash outlay for dividends is expected to remain flat at approximately $44 million. As such, DBRS Morningstar expects the Company’s free cash flow (after dividends and capex but before changes in working capital) to remain in a modest deficit position. DBRS Morningstar expects CanWel to use a combination of debt and equity to invest in growth through acquisitions and finance any free cash flow deficits. As such, DBRS Morningstar believes that CanWel’s credit metrics will improve toward a level more appropriate for the current rating (i.e., lease-adjusted debt-to-EBITDAR of around 6.0 times). That said, should CanWel be challenged to maintain credit metrics in a range considered acceptable for the current B (high) rating for a prolonged period, as a result of weaker-than-expected operating performance and/or more-aggressive-than-expected financial management, a negative rating action could result.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Merchandising Industry, Rating Companies in the Forest Products Industry, including Appendix I – Timberland Operators and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on dbrs.com under Methodologies & Criteria.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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