Thread by @DownunderValue

Midway $MWY $MWY.AX is Australia’s largest pure-play woodfibre company on the #ASX, exporting woodchips for pulp and paper to Asia. Covid-19 prices have recovered, hard and fast. Is the sun about to shine on this cyclical?

Let’s take a deep dive. 👇

1. Investment Thesis: Cyclical. Midway treaded water during the lean periods, and with pulp & paper prices on a tear they’re in a perfect position to benefit. Paying bottom cycle prices of 65c in the dollar. Short to medium term hold, no need for 💎👐

2. Midway is a small cap ($93M MC, $133m EV), with operations dating back to 1980. Midway was first listed in 2016 and keeps much of the same management in place. A fully integrated woodchip company from plantation, harvest, processing and exporting.

3. Woodchips are used to create kraft pulp. Typically Japan has been hungry for high end paper, though more recently this has transitioned to greater portion of tissue paper (Covid related) and packaging (China's demand).

4. Export markets have changed over the years, from nearly a pure-play Japan to China now being the #1 market with ~60% of revenue. However, this was impacted severely by Covid-19 leading to lower volumes, prices and revenue.

5. Conflating the issue, China banned saw log exports from Australia in Nov-Dec 2020 as part of their geopolitical “hissy fit” (technical diplomat talk there). Concerns over woodchips further pushed the stock price down.

6. Through 2020 the global prices for forestry products (lumber, woodchips, etc) stabilized as inventories dropped.

Since late 2020, inventories bottomed while demand started to increase...

7. NBSK Pulp prices for Global, Asia and China have been on a tear since… doubling in a few months, and still below peak prices with a decent runway to go.

8. Future prices are also increasing, and expecting that these prices will hold into the medium term (futures for next 3yrs are at near peak highs).

Japanese prices for Midway are often contracted midyear for the full year inc. backdating revenue contracts.

9. Funny stuff if you’re on FinTwit and on the right side the bet.

h/t @ignorenarrative @northmantrader and whomever else shared this (sorry if I missed you)

10. Midway is in the prime position to benefit from this up-cycle. E.g. South West Fibre (51% JV with Mitsui $8031.T) was temporarily closed in April '20 due to lower export demand as a cost cutting initiative, and reopned in Jan '21 which will be EBITDA accretive in 2H21.

11. Looking at Midway's history in good times will give us a good understanding of where things are heading in the future...

Will Midway be able to regain 2016-19 share prices of $2.50-$3.50? Let’s look at their performance.

12. 2017 was the first full year of operations on the ASX. Revenues of $210m, EBTIDA of $24m, margins of only 11%, NPAT of $15m and Dividends of 18c.

Prices were relatively low, and started to seek additional plantation supply to for existing customers.

13. 2018 focused on improving operational performance. Revenues and EBITDA slightly up to $231m and $29m, though NPAT up 25% to $18m. Dividend remains 18c, and payout ratio drops from ~91% to ~73%.

14. 2019 revenue increased to $283m on the back of high prices, flowing to EBITDA ($37m), NPAT ($20.5m) and dividends (18c, 67% payout).

During FY19 they acquired and integrated strategic assets toboot, reducing their operating costs and creating platform for volume expansion.

15. 2020 and 1H21 was pretty dim for poor Midway. Fortunately, low leverage (30%), significant supply contracts (Mitsui JV), temporary closure of mills, and being the market leader in Australia meant they could tread water. Operating cash flow positive, NPAT negative.

16. In the short term, 2H21 and FY22 looks like marginal increase in volume from SWF Portland and significant price increases (up to +30% revenue) particularly for china exports .

17. In the medium term, volumes set to increase as Midway has invested heavily in plantation and processing capacity. Expecting 10.2% CAGR volume growth / 3yrs.

18. Net tangible assets are ~$1.50 per share, providing a good margin of safety - Paying around 65c in the dollar. Asset recycling could increase the book value and reduce the NTA premium, though this may take time to play out.

19. Asset valuation is also conservative. $81m is plantation (+10% in FY20), and recent sales have been above book value. Asset price inflation driving up rural land values could see some reevaluations / significant items on the balance sheet, pushing up statutory profits.

20. Significant insider holding with McCormack ~10%, Bennett ~3%, and director’s buying in 2019 at $1.57 and 2020 at $0.97c – no selling.

As shareholders they also like to payout a large portion of the NPAT as dividends – so you get your returns as cash quickly.

21. Moat: Midway is vertically integrated with strategic assets (ports, forestry licenses, etc) that would make it difficult for new entrants in Aus.

However, no pricing power. So really, not a long term hold.

22. Risk: China has banned softwood logs from Australia but not chips, so potential geopolitical issues remain. Ongoing appreciation of AUD would hit the bottom line. Longer term, poor capital allocation by management is something to look out for.

23. Overall, the risk-reward looks very good. Downside there is asset protection, and Midway can claim most the upside in volume/prices as NPAT with operating costs largely fixed. A good set of earnings in FY21-22 could see a reset on the stock price.

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A deep dive per week is my commitment to FinTwit.

Questions and feedback always welcome. DYOR.

Disclaimer, I'm long MWY.