Pacific Trader: Langley building products distributor Adentra gets its house in order

The stock: The recent Paris Olympics offered some cheer-worthy examples of Canadian athletes persevering through adversity, like the women’s soccer team making the knockout rounds despite being docked six points for their coaches’ drone surveillance and Andre De Grasse powering the men’s 4X100 team to gold on a twitchy hamstring. The stock market offers examples of companies powering through the headwinds too. Take a look at Langley-based building products distributor Adentra (TSX:ADEN), which is up 28.3 percent so far this year, in spite of high interest rates that are deterring both home-building and renovations.

The drivers: The company formerly known as Hardwoods Distribution did some heavy lifting in 2023 to repay $224 million of its own debt, which left it in a good position to resume acquisitions of often discounted smaller competitors this year. A good example is its July takeover of Woolf Distributing Company in the U.S. Midwest for US$130 million.

Second-quarter financial results released last week, meanwhile, showed an 81.6-percent increase in net income year-over-year to US$17 million ($1.01 per share) on only slightly softer sales of $751.9 million. That suggests the company is doing a better job of containing costs. Adentra pays a quarterly dividend of 14 cents a share, which works out to a yield of 1.4 percent based on a closing price of $40.37 on Tuesday (August 13).

Should interest rates in the U.S. begin to decline alongside those in Canada, Adentra could find itself with the wind at its back before long.

Word on the street: Several analysts have raised their price targets for Adentra stock since the Woolf acquisition was announced. “The transaction advances the goal of adding US$800 million in sales via M&A over the next five years through 2028, but perhaps more importantly, it further shifts the mix to higher-margin specialty products and channels,” said Scotiabank’s Jonathan Goldman, who bumped his target up to $52.50 with a “sector outperform” rating. “As investors see continued evidence of structural margin expansion via improved mix, we think shares will re-rate closer to specialty building product peers.”

Coming and going: A&W Revenue Royalties Income Fund (TSX:AW.UN) and its privately held parent, A&W Food Services of Canada, have announced a reorganization whereby the two will merge into a tentatively named “A&W Food Services NewCo.” Income Fund unitholders will have the option to exchange their units for shares in the NewCo on a one-for-one basis or $37 cash, representing a 30-percent premium over the units’ price before the announcement. Pending approval by two-thirds of unitholders, the deal is expected to close in October.