Small Caps | Mar 12 2019
Favourable demand/supply dynamics underpin wood fibre exporter Midway, which has impressed brokers with its expansion plans.
-Decline in Oz dollar, lower transport costs and price increases underpin outlook
-Supply network increased to meet wood fibre demand from Asia
-Unnecessarily large discount to domestically-exposed agricultural peers
By Eva Brocklehurst
Australia's largest hardwood and softwood fibre exporter, Midway Ltd ((MWY)) has a buoyant outlook, as demand soars for higher quality packaging, as well as rayon for clothing. The company's strategic priority is to expand and diversify into complimentary forestry verticals, and to this end has made two acquisitions to obtain a presence in Western Australia.
Midway has also secured additional production assets on Melville Island, creating efficiencies that enable its management of the entire wood fibre supply chain. The company has invested for the longer term and now boasts multiple areas of growth, providing operating efficiencies as well as diversification into the log export market.
Current trading conditions are favourable, given an 11% increase in blue gum eucalyptus prices for Chinese and Japanese customers. Shaw and Partners notes Midway is effectively the de facto price setter in the Australian market. The decline in the Australian dollar has helped as well as lower transport costs from falling oil prices, and dry weather has improved the bone dry wood content.
Shaw and Partners assesses a large addressable market is available to Midway and the company has impressive operating earnings (EBITDA) compound growth of 14% over the next four years. Free cash flow is increasing and maintenance expenditure requirements are low.
A slower than expected start to the restructured operations at Plantation Management Partners was caused by a breakdown of equipment. Maintenance has been undertaken and new equipment is expected to rectify the issue, funded out of a capital raising.
The track record of growing wood fibre supply to meet customer demand in Asia has been assisted by the expansion of the company's supply network. Supply arrangements and commitments have increased FY21 production estimates to 3880 tonnes.
Midway supplies an estimated 7% of the total volume of Asian hardwood fibre imports. Shipments are made from the network of port facilities located in Geelong, Portland, Brisbane, Bell Bay and Melville Island. The company sources its logs from private plantation owners in Victoria, South Australia, NSW, Queensland and Tasmania.
Bell Potter, which has a Buy rating and $3.94 target, observes there is an attractive dividend yield on offer, around 7%, as well as potential corporate appeal in the stock. Shaw and Partners agrees that, despite a highly fragmented and capital intensive industry, Midway is providing high returns.
The timber supply is secure, with contracts ranging out to 10 years. There is a constrained global supply, Shaw and Partners notes, and a 4mt deficit is expected by 2020 in hardwood. The company also has strong customer relationships with major importers in China and Japan.
Shaw and Partners points out the company survived with an Australian dollar at over US$1 some years ago, while peers struggled. Currently, the stock trades at a significant -25% discount to domestically-exposed agricultural peers. The broker accepts Midway should trade at a discount to peers but believes the quantum is too large.
Tailwinds are significant and are expected to remain well into FY20. Traditionally, sales are higher in the second half, as winter conditions in south-west Victoria constrain the ability to source wood fibre in some locations. Shaw and Partners retains a Buy rating and $4.00 target.
Morgans agrees the company has a bright future amid positive industry fundamentals. As new growth projects do not fully contribute until FY20, the broker focuses on this particular year, reiterating an Add rating and $3.90 target and assessing further acquisitions or growth opportunities as being the next catalyst.
Growth projects and acquisitions have strengthened the volume outlook and the company continues to replant existing land, secure contracts with third parties and invest in plantation expansion to maintain its long-term fibre supply. The company is actively assessing acquisition opportunities in Tasmania.
Ord Minnett believes the company is poised for for additional upside after the full year result in August as rises in woodchip prices taking affect from January 1, 2019 will be realised. The broker forecasts revenue from wood fibre processing to reach $325m in FY19. Ord Minnett has a Buy rating and $4.37 target.
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