Acadian Timber (ADN.TO) is a leading supplier of primary forest products in Eastern Canada and the Northeastern U.S. The company owns approximately 2.4 million acres of land under management. Acadian is the second largest timberland owner in New Brunswick and Maine.
Acadian also operates approximately 1.1 million acres of freehold timberlands in New Brunswick and Maine and provides timber services relating to approximately 1.3 million acres of crown corporations. Acadian’s products include softwood and hardwood sawlogs, pulpwood and biomass by-products that are sold to approximately 100 regional customers.
Acadian’s stated business strategy is to maximize cash flows from the company’s existing timberland assets. The company looks to grow the business by acquiring assets on a value basis and using an operations-oriented approach to drive improvements.
Acadian is a boring business with no analyst coverage and looks extremely cheap with a price to earnings of 12. The market cap of the company is $333 million.
The company’s strategy is focused on maintaining a low cost of production and customer relationships within the industry, while deploying a sustainable strategy that reuses land year after year rather than re-planting the entire land parcel.
Brookfield Asset Management (NYSE:BAM)(TSX:BAM.A) owned 45% of the shares outstanding, but sold the entire stake in Q2 2019, which resulted in a drastic decline in Acadian’s stock price leading to a buying opportunity of a lifetime.
The sale was advantageous to Acadian, as it terminated a management fee agreement with Brookfield, which will save Acadian money over the long term.
Brookfield sold the stake to Macer Forest Holdings Inc. and Acadian entered into an agreement with the external manager, Brookfield Timberlands Management LP to terminate the management agreement between Acadian and Brookfield LP and internally manage Acadian’s asset management and administrative services functions.
The aggregate consideration paid to Brookfield LP in connection with the termination of the management agreement was $18 million which was satisfied in cash during the third quarter.
The management fee and the annual performance fee were discontinued, which was to Acadian’s benefit, as it would reduce the company’s administration costs and increase earnings on a proforma basis.
The company’s sales are tied to macroeconomic factors because the company’s products are primarily used in residential construction and the number of housing starts reduces as economic conditions worsens.
Acadian has managed to control these risks by securing multi-year contracts and diversifying the company’s revenue streams with management services.
In the timberland industry, fragmentation is high with the top four companies composing 35% of the industry. Acadian has a return on invested capital of 6.32%. With a 5.7% annual dividend yield, excellent value-oriented management and sustainable harvesting practices, the stock can provide excellent risk adjusted returns and be a capital compounder.
The company also has strong balance sheet, well diversified markets and top-class operating team. Acadian is therefore well positioned to meet regular dividend payments from free cash flow.
The company recognizes that Acadian’s stock is undervalued and has been regularly repurchasing shares under a normal course issuer bid, and management has stated that the company will seek opportunities to buy more at the right price.