jctcf write up post split vic

7/28/2019 JCTCF Write Up Post Split VIC

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Jewett-Cameron (JCTCF) Investment Thesis

Security: Jewett-Cameron common stockDate: 5/28/2013Price: $10.00Timing: 12 monthsCatalyst: NM; continued share repurchase can be soft catalyst

Summary Thesis:

Small home and building products company with stable, modest growth and optionality on keysegment

Lawn, garden & pet segment provides stable, core FCF with modest growth Industrial wood segment provides upside optionality on boating and other specialty plywood

markets

Management is very shareholder friend and capital allocation is heavily geared toward savvyshare repurchases

Valuation is very attractive

Summary Valuation & Financials:

Market Summary JCTCF Valuation 2011 2012 LTM Normalize

($ in millions)

Price 5/28/13 10.00 EV / EBIT 8.7x 7.1x 5.7x 4.9x

Shares 3.1 EV / EBIT 9.5x 7.6x 6.0x 5.2xMarket Cap $31.4 P / E 26.5x 14.8x 10.6x 8.9x

Net Debt (4.3) P / E (Ex-Cash) 22.8x 12.8x 9.1x 7.7x

Enterprise Value 27.0


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Smal l home and buil ding products company with stable, modest growth and optional i ty on key segment

Jewett-Cameron is a small industrial conglomerate that was acquired by an investor group includingcurrent CEO Don Boone and Secretary Michael Nasser in 1984. The business is made up of foursegments with one (Lawn, Garden & Pet) contributing the vast majority of the operating earnings.

There are three aspects to the investment thesis on Jewett-Cameron:1. The business generates stable and moderately growing earnings and cash flow2. The business has some optionality on the recovery of its Industrial Wood segment3. Most importantly, the business is run by a 72 year old CEO who has been in charge for 28 years,

who owns 32% of the shares outstanding, who has paid himself a $36,000 annual salary for overa decade and who has repurchased almost 40% of the company in the past two and a half years

Lawn, Garden & Pet segment provides stable, core FCF with modest growth

The Lawn, Garden & Pet segment manufactures and distributes wood and specialty metal products.

The wood products consist of fencing and landscape timbers1 and account for 29% of the segment sales.

The company sources the lumber from independent lumber mills and either sells to other distributors or tohome improvement retailers.

The specialty metal products include gates2, dog kennels3, greenhouses45 and storage sheds6. The metalproducts account for 71% of the segment sales and are primarily sold to home improvement retailers.

While the company does not breakdown the profitability of the different subsegments, metal productshave higher gross margins. The segment is less economically sensitive than residential construction

markets and has been a source of moderate growth and a strong earnings contributor.

Fiscal Year Ending October

2006 2007 2008 2009 2010 2011 2012 LTM

Lawn Gar den Pet & Other


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I ndustr ial wood segment provides upside optional i ty on boating and other special ty plywood markets

The Industrial Wood segmenton the other hand- is very economically sensitive and particularly leveredto the boating industry. The segment is a wholesale distributor of specialty wood products, primarily forthe boating industry. The specialty plywood product7 is predominately used for flooring and panels inrecreational boats but also has other uses in transportation (for buses and subway interior flooring) andsome limited export market applications.

The boating industry has been severely impacted by the recession with industry volumes falling to multi-decade lows. Accordingly, segment sales into the boating industry have decreased substantially and the

segment is not generating any meaningful profits. An eventual rebound in the boating industry is likely tohappen at some point so management has maintained the production capacity to participate in a recovery,but management does not believe that a recovery will occur within the next few years. Other industrysources8 believe that a limited recovery may be possible sooner than that.

At its peak, the Industrial Wood segment provided over $1.7 million in EBIT compared to break-evencurrently. While the outlook for the boating industry remains weak, the company has had some limitedrecent success in exporting their specialty plywood with most recent quarter sales up 59% year-over-year

and the segment showing a modest operating profit.

The segment is fully cash flow sufficient and provides upside optionality in the event of a recovery in theboating or transportation markets or further management success in finding new applications for theirspecialty plywood.

Fiscal Year End ing October

2004 2005 2006 2007 2008 2009 2010 2011 2012 LTM Norm. (2)

I ndustria l Wood Products

Sales $52.7 $55.4 $49.1 $41.2 $28.0 $11.5 $9.0 $8.5 $7.9 $8.2 $30.3Growth 19% 5% (11)% (16)% (32)% (59)% (21)% (6)% (7)% 10%

EBIT 1.7 1.6 1.7 1.1 1.0 (0.4) (0.6) (0.4) (0.1) 0.0 0.6

Margin 3% 3% 3% 3% 4% (3)% (6)% (4)% (1)% 0% 2%

% to Boat Manufacturers (Segment) 50% 47% 49% 67% 59% 24% 11% 15% 17%


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Jewett-Cameron Lumber was founded in 1953 as a small lumber wholesaler in Portland Oreland. DonBoone purchased the company in 1984 from the original shareholders and in the next several years

completed several additional acquisitions. In 1986, Jewett-Cameron purchased an importer anddistributor of pneumatic air tools and industrial clamps called Material Supply International (now knownas MSI-Pro in the Industrial Tools segment). In 2000, Jewett acquired a seed and grain processing,storage and brokerage business called Agribiotech (now the Seed Processing and Sales segment). Lastly,in 2002, Jewett acquired Greenwood Forest Products, a processor and distributor of industrial wood andother specialty building products.

These business segments are rather unexceptional on their own, but CEO Boone has been able to squeezeexceptional growth out of themdespite several industry headwinds from the largest segment contributor

in 2002because of exceptional capital allocation and cost control.

Boones friendliness towards minority shareholders can be evidenced by the salary he pays himselfrelative to the value of his holdings.

A d il d l k h h h i i f h h h h d

Growth Summary FYE Oct 10 Year

(in millions except per share data) 2002 2012 CAGR LTM

Revenues $43.6 $45.9 0.5% $50.5

Net Income 0.8 2.3 10.7% 3.0

Shares Outstanding (1) 4.7 3.4 (3.1)% 3.1

EPS (1) 0.18 0.67 14.3% 0.94

Share Price (1) $1.81 $4.80 10.3% $10.00

Don Boone Holdings (shares in millions) (1) 1.35 0.99 (3.0)% 0.99

Value of Holdings $2.4 $4.8 6.9% $9.9

Don Boone Salary ($ in thousands) $36.0 $36.0 0.0% $36.0

(1) Adjusted for 3:2 share splits in fiscal 2003 and fiscal 2007 and 2:1 split in 2013.


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Valuation i s very attractive

As mentioned, Jewett-Camerons current valuation is very attractive and does not reflect the industrymomentum in its core segments or give credit to management for their capital allocation abilities.

While we think the business is undervalued as a whole, given the disparate nature of the segments, a sum-of-the-parts analysis may be appropriate. Considering the multiples used:

Lawn, Garden, Pet: Given the stability of the business and the recent growth (34% year-over-year growthlast quarter), we assign a 13.5x earnings multiple

Industrial Wood: The business has essentially no current earnings but has averaged $0.6 million inoperating earnings over the past 10 years, so we assign a 12.5x multiple to that segment and discount it by10% over 5 years to achieve a normalized valuation

Seed Processing and Industrial Tools: These segments do not contribute significantly to the overallearnings profile and we value them at 10x LTM earnings

Sum of the Parts Normalized

EBIT Earnings Multiple Value Discount Value Per Share

Lawn, Garden, Pet & Other $4.2 $2.7 13.5x $36.5 0% $36.5 $11.65

Industrial Wood Products 0.6 0.4 12.5x 5.2 38% 3.3 1.04

Seed Processing & Sales 0.1 0.1 10.0x 0.8 0% 0.8 0.26

Industrial Tools 0.2 0.2 10.0x 1.6 0% 1.6 0.49

Enterprise Value $5.2 $3.4 13.1x $44.1 $0.4 $42.2 $13.44

Net Cash 4.3 1.38

Greenwood Forest Products Litigation - 0% - -

Equity Value 46.5 14.83

Per Share $14.83

Currernt Price 10 00


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Buyback Accretion

Fiscal Year Ending October Estimated Growth

LTM 2013 2014 2015 2013 2014 2015

Operating Income

Lawn, Garden, Pet & Other $4.2 $4.4 $4.6 $4.6 5% 5% 0%

Industrial Wood Products 0.0 0.0 0.0 0.0 10% 10% 10%

Seed Processing & Sales 0.1 0.1 0.1 0.1 0% 0% 0%

Industrial Tools 0.2 0.2 0.2 0.2 0% 0% 0%

Total $4.5 $4.8 $5.0 $5.0

Taxes (1.6) (1.7) (1.7) (1.7)

Net Income 3.0 3.1 3.2 3.2

Shares 3.1 2.8 2.3 1.8EPS $0.94 $1.11 $1.40 $1.78

P/E 10.6x 9.0x 7.1x 5.6x

P/E (Ex-Cash) 9.2x 8.0x 6.6x 5.6x

Beginning Cash 4.3 4.3 3.2 1.6

Cash Flow (1) - 2.3 3.2 3.2

Buyback - (3.5) (4.8) (4.8)

Ending Cash 4.3 3.2 1.6 (0.0)

% of Cash Flow Used 150% 150% 150%

Buyback Amount 3.5 4.8 4.8

Share Price 10.00 10.00 10.00

Shares Repurchased 0.3 0.5 0.5

(1) Assumes one quarter of cash flow already reflected in LTM period for fiscal 2013.


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Historical Financial Summary

Fiscal Year Ending Octob er

I ncome Statement 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 LTM

Revenues $29.1 $24.5 $22.1 $43.6 $55.5 $71.3 $74.6 $76.1 $70.5 $64.3 $42.1 $41.6 $42.1 $45.9 $50.5

COGS (24.8) (20.6) (17.9) (36.5) (47.7) (63.1) (65.3) (64.8) (58.8) (52.9) (33.2) (32.0) (33.9) (37.3) (41.0)

Gross Profit 4.3 3.9 4.2 7.1 7.8 8.2 9.3 11.3 11.7 11.4 8.9 9.5 8.1 8.6 9.5

G&A (2.9) (2.5) (3.5) (5.8) (7.0) (7.0) (7.8) (7.7) (8.2) (7.0) (6.2) (5.8) (5.3) (5.1) (5.0)

EBIT 1.5 1.4 0.8 1.3 0.8 1.2 1.5 3.6 3.6 4.4 2.7 3.7 2.8 3.6 4.5

Net Interest Expense (0.1) (0.1) (0.1) (0.1) (0.3) (0.4) (0.1) (0.1) (0.2) (0.2) (0.0) (0.0) (0.4) 0.0 0.1

Other - - - - - - - - - - - - - - -

Pre Tax Income 1.4 1.3 0.7 1.3 0.5 0.9 1.4 3.5 3.4 4.2 2.6 3.7 2.4 3.6 4.5

Taxes 35% (0.5) (0.5) (0.2) (0.5) (0.2) (0.3) (0.5) (1.2) (1.2) (1.5) (0.9) (1.3) (0.8) (1.3) (1.6)

Net Income 0.9 0.9 0.4 0.8 0.3 0.6 0.9 2.3 2.2 2.7 1.7 2.4 1.6 2.3 3.0

Shares Outstanding (split adjusted) 5.2 4.7 4.6 4.7 4.6 4.6 4.6 4.6 4.8 4.8 4.8 4.8 4.1 3.4 3.1

EPS 0.17 0.18 0.09 0.18 0.07 0.12 0.20 0.50 0.46 0.57 0.36 0.51 0.38 0.67 0.94

Revenues Growth (15.8)% (9.7)% 97.3% 27.1% 28.6% 4.6% 2.0% (7.3)% (8.8)% (34.5)% (1.3)% 1.2% 9.2%

Gross Margin 14.9% 15.8% 19.1% 16.3% 14.1% 11.6% 12.4% 14.9% 16.7% 17.7% 21.1% 22.9% 19.3% 18.8% 18.8%

G&A (% of Sales) 10.0% 10.1% 15.7% 13.2% 12.6% 9.8% 10.4% 10.1% 11.6% 10.9% 14.8% 14.0% 12.6% 11.0% 10.0%

EBIT Margin 5.0% 5.7% 3.5% 3.1% 1.5% 1.7% 2.0% 4.8% 5.1% 6.8% 6.3% 9.0% 6.7% 7.8% 8.9%

D&A (% of Sales) 0.6% 0.5% 1.0% 0.7% 0.6% 0.5% 0.5% 0.4% 0.4% 0.5% 0.8% 0.6% 0.6% 0.5% 0.5%

Capex (% of D&A) 6.5% 35.8% 771.0% 114.3% 17.3% 158.4% 19.4% 28.7% 23.3% 20.3% 78.6% 92.8% 45.4% 127.6% 170.9%

Cash Flow Statement

Net Income 0.9 0.9 0.4 0.8 0.3 0.6 0.9 2.3 2.2 2.7 1.7 2.4 1.6 2.3 3.0

D&A 0.2 0.1 0.2 0.3 0.3 0.4 0.4 0.3 0.3 0.3 0.3 0.3 0.3 0.2 0.2

Capex (0.0) (0.0) (1.7) (0.3) (0.1) (0.6) (0.1) (0.1) (0.1) (0.1) (0.2) (0.2) (0.1) (0.3) (0.4)

FCF 1.1 0.9 (1.0) 0.8 0.6 0.4 1.2 2.5 2.4 3.0 1.8 2.4 1.7 2.3 2.8

Share Repurchase (0.3) (0.4) (0.2) (0.2) 0.1 0.0 - 0.1 0.1 0.1 - (0.5) (3.5) (3.1) (2.6)

Net Cash Balance

Cash 0.2 0.2 0.3 0.5 0.2 0.3 0.6 0.1 0.3 5.8 6.8 8.7 6.8 7.3 4.3

Debt 0.1 - 0.3 3.0 8.3 8.1 4.3 2.1 2.3 2.0 - - - - -

Net Cash (Debt) 0.1 0.2 0.0 (2.5) (8.0) (7.9) (3.7) (2.0) (2.1) 3.8 6.8 8.7 6.8 7.3 4.3

Insider Ownership

Don Boone 1.13 1.15 1.14 1.14 1.11 0.99

Michael Nasser 0.45 0.45 0.55 0.55 0.52 0.37

Subtotal 1.58 1.60 1.69 1.69 1.63 1.37

% of Outstanding 33.2% 33.5% 35.3% 35.4% 39.5% 39.6%


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Segment Summary

Fiscal Year Ending Octobe r

Segment Results 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 LTM

Segment Revenues

Lawn, Garden, Pet & Other (1) $28.0 $23.4 $19.4 $14.7 $7.1 $12.8 $13.3 $20.4 $21.4 $27.8 $24.8 $25.5 $26.5 $29.8 $33.9

Industrial Wood Products - - - 25.6 44.2 52.7 55.4 49.1 41.2 28.0 11.5 9.0 8.5 7.9 8.2

Seed Processing & Sales - - 1.8 2.6 3.3 4.8 4.8 5.6 7.0 7.4 4.4 4.3 5.2 5.7 6.0

Industrial Tools 1.1 1.1 0.9 0.8 0.9 1.0 1.1 0.9 1.0 1.1 1.5 2.7 1.9 2.5 2.4

Total 29.1 24.5 22.1 43.6 55.5 71.3 74.6 76.1 70.5 64.3 42.1 41.6 42.1 45.9 50.5

Revenues Growth

Lawn, Garden, Pet & Other (17)% (17)% (24)% (52)% 81% 4% 53% 5% 30% (11)% 3% 4% 13%

Industrial Wood Products NM NM NM 73% 19% 5% (11)% (16)% (32)% (59)% (21)% (6)% (7)%

Seed Processing & Sales NM NM 43% 27% 46% (0)% 17% 24% 5% (41)% (1)% 20% 10%

Industrial Tools 3% (17)% (16)% 13% 14% 8% (14)% 8% 13% 33% 81% (30)% 33%

Total (16)% (10)% 97% 27% 29% 5% 2% (7)% (9)% (35)% (1)% 1% 9%

Segment Income Fr om OperationsLawn, Garden, Pet & Other $1.3 $1.3 $0.7 $0.4 ($0.1) ($0.6) ($0.2) $1.8 $2.2 $3.0 $3.0 $4.1 $2.9 $3.5 $4.2

Industrial Wood Products - - - 0.6 0.7 1.7 1.6 1.7 1.1 1.0 (0.4) (0.6) (0.4) (0.1) 0.0

Seed Processing & Sales - - 0.0 0.2 0.0 0.1 (0.0) 0.1 0.2 0.3 0.0 0.1 0.2 0.1 0.1

Industrial Tools 0.1 0.2 (0.0) 0.1 0.1 0.1 0.1 0.0 0.1 0.1 0.0 0.1 0.1 0.1 0.2

Total 1.5 1.4 0.7 1.3 0.7 1.2 1.5 3.6 3.6 4.4 2.6 3.7 2.8 3.6 4.5

Margins

Lawn, Garden, Pet & Other 5% 5% 4% 3% (2)% (5)% (2)% 9% 10% 11% 12% 16% 11% 12% 12%

Industrial Wood Products NM NM NM 2% 2% 3% 3% 3% 3% 4% (3)% (6)% (4)% (1)% 0%

Seed Processing & Sales NM NM 2% 10% 1% 2% (0)% 2% 3% 4% 1% 3% 3% 1% 2%

Industrial Tools 11% 14% (3)% 11% 12% 9% 11% 4% 8% 10% 1% 4% 4% 6% 10%

Total 5% 6% 3% 3% 1% 2% 2% 5% 5% 7% 6% 9% 7% 8% 9%

(1) Prior to 2005, segment was named US and South Pacific Building Materials (1999 - 2000) and Lumber and Building Materials (2001 - 2004).

(2) Normalized estimates assume LTM actual results for Lawn, Seed Processing and Industrials Tools segments and 2002 - 2012 average results for Industrial Wood Products.


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Comparable Valuation Summary:

2013 2013 2014

Share Market Enterprise EV / EBITDA P / E Sales EBITDA EPS Debt /

Price Cap Value 2013 2014 2013 2014 Growth Margin Growth ROIC EBITDA

Jewett-Cameron Trading 10.00 31 27 5.7x NM 10.6x NM 9.2% 9.4% NM 28.6% -0.9x

Lawn, Garden & Pet Peers

Central Gard en & Pet Co mpany 7.76 382 965 9.0x 7.8x 17.4x 11.2x 3.0% 6.9% 55.1% 4.2% 5.4x

The Scotts Miracle-Gro Company 48.85 3,014 4,110 10.9x 10.0x 19.2x 16.3x -0.8% 14.0% 17.6% 11.5% 2.9x

Spect rum Brands Hold ings , Inc. 61.76 3,220 6,445 10.2x 9.1x 59.3x 15.5x 26.5% 16.0% 282.3% 8.1% 5.1x

Buildin g Product Peers

Bluelinx Holdings Inc. 2.45 212 655 NM NM NM NM -100.0% NM NM NM NM

Boise Cascade Company 29.10 1,258 1,274 8.4x 6.8x 19.9x 15.3x 81.9% 4.7% 29.7% 10.7% 0.1x

Headwaters Incorporated 11.24 821 1,245 10.5x 8.9x 51.1x 23.2x 13.0% 18.4% 120.5% 8.0% 3.6x

Builders FirstSource, Inc. 6.99 670 914 19.6x 10.0x NM 21.2x 41.3% 5.2% -760.0% 5.8% 5.2x

Huttig Building Products Inc. 2.35 57 128 42.8x 42.8x NM NM 6.2% 0.6% NM 0.3% 23.8x

Griffon Corporation 11.95 649 1,231 7.9x 7.2x 39.8x 26.6x -0.9% 8.6% 50.0% 4.2% 3.7x

Other Peers

Louisiana-Pacific Corp. 18.98 2,645 2,965 6.7x 6.5x 11.9x 11.9x 29.3% 19.6% -0.6% 12.3% 0.7x

Plum Creek Timber Co. Inc. 50.80 8,272 10,648 21.0x 20.1x 37.1x 30.1x 5.3% 37.0% 23.4% 6.5% 4.7x

Weyerhaeuser Co. 31.78 17,405 20,933 13.0x 11.9x 26.0x 21.2x 20.8% 19.7% 22.6% 8.9% 2.2x

Average 14.5x 12.8x 31.3x 19.2x 10.4% 13.7% -16.0% 7.3% 5.2x

Median 10.5x 9.1x 26.0x 18.7x 9.6% 14.0% 26.5% 8.0% 3.7x

Source: CapIQ consensus estimates.


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Boating Industry Data:


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Plywood vs. OSB Outlook:

jctcf write up post split vic

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