Colabor Group Inc (TSX: GCL) is a distributor of food and non-food products, including private-label and other brand-name products, to independent distributors, which in turn resell them to foodservice businesses (cafeterias, restaurants, hotels, restaurant chains, etc.) and supermarkets, convenience stores. Colabor distributes approximately 50,000 products sourced from 600 suppliers and manufacturers to over 25,000 points of sale. The Company is serviced by small to medium-sized wholesale distributors operating in Quebec, and the Atlantic Provinces.

Revenue Mix

Source: Kalkine, Annual Report

Investment Rationale

• Bullish Price Trend: At the last closing price, the stock was trading above all the crucial long-term and short-term support levels of 30-day, 50-day, and 200-day SMAs, signalling a bullish price momentum. Also, the moving averages are rising consistently on the daily price chart, which is another bullish indicator. Moreover, the leading momentum indicator the Moving Average Convergence Divergence (MACD) is hovering well above its 9-day signal line, which is a bullish trend. The difference between 12-day and 26-day EMAs is also positive, which is making the momentum stronger. Further, the 14-day and 9-day RSI is hovering in a neutral zone and tilted towards the overbought zone, which indicates the further scope of a price increase.

Source: Refinitiv, Thomson Reuters

• Cross-over Appeared on the Daily Price Chart: In the September 21, 2020 trading session, shares of GCL registered a cross-over on the daily price chart and traded above its strong long-term resistance level of 200-day SMA and managed to trade above it in the last two trading session. This reflects that GCL shares have created a new long-term support level and entered into a bullish zone.

Source: Refinitiv, Thomson Reuters

• Insiders are Increasing the Stake: It is quite encouraging for the shareholder that the Company’s President & CEO, Louis Frentte and Robert John Briscoe have significantly increased in their stake over the last 6-Months. Further, eight out of nine insiders have increased their stake in the Company over the past one year, which implies that insiders are bullish on the business prospects and using correction as the buying opportunity. Further, the recent purchase by Louis Frenette was the biggest purchase of Colabor Group shares made by an insider individual in the last twelve months.

• Solid liquidity position and Higher Free Cash Flow Yield: The Company has adequate liquidity to comfortably pass through the current challenging operating environment. The Company’s current ratio stood at 1.45x vs 1.33x of industry median, and its quick ratio stood at 0.80x vs 0.68x, which indicates that Company is well-positioned to cover its short-term obligation better than its peers. Moreover, the Company has significantly higher free cash flow yield of 11%, which provides a strong margin of safety to the investors.

• Risk Associated to Investment: The crisis surrounding the pandemic is evolving rapidly and could have a significant unfavourable impact on operations, the operating results and the financial position of the Company. The magnitude of the potential impact of the pandemic on the Company and its activities would depend on future developments, which involve a high degree of uncertainty and which cannot be predicted with certainty, which includes the spread of the disease, the duration of the outbreak, the impact on consumers, possible disruptions in the supply chain.

2QFY20: Financial Highlights

Source: Company Filings

• Despite an unfavourable impact of the COVID-19 on the group's business, Colabor does not currently expect a negative impact on its free cash flow.
• Colabor has signed agreements to extend the maturity of its credit facility and subordinated debt, which, combined with the first-half results, will allow Colabor to pursue its 2020 action plan.
• Net debt decreased to CAD 63.0 million as on June 13, 2020, compared to CAD 68.2 million at the end of the fiscal year 2019, which had a positive effect on the financial leverage ratio, which stood at 2.3x, an improvement from 2.5x recorded at the end of last fiscal year.
• The Company's working capital was CAD 41.6 million, down from CAD 58.1 million at the end of the fiscal year 2019. This variance is mainly due to the end of the contract with Recipe, sale of some assets of the Summit division and the reduced level of activity caused by the pandemic.
• Consolidated sales of the second quarter were CAD 95.5 million, down 47.2% compared to the corresponding period of 2019 resulting mainly from the effects of the pandemic and the volume loss in the Broadline distribution sector caused by the non-renewal of non-profitable contracts in Broadline distribution activities in Quebec and by the termination of a contract in Specialized distribution activities. Cumulative consolidated sales amounted to CAD 207.1 million, down 32.6% compared to the corresponding period of 2019.
• Adjusted EBITDA from continuing operations reached CAD 7.6 million, compared to CAD 8.7 million recorded in the previous corresponding period.
• Second-quarter net earnings from continuing operations stood at CAD 1.6 million, down CAD 1.3 million compared to CAD 2.9 million for the corresponding quarter of 2019, due to lower sales.

Stock Performance

After recording a steep correction in the recent past, the stock of GCL is now recovering. Its share bagged approximately ~21% in the last one month and featuring a positive price return in the past 5-day trading sessions and 3-Month period. This reflects that upside momentum is building in the stock.

Also, its shares have registered a strong price recovery from its 52W low price of CAD 0.20 recorded on April 01, 2020. At the last traded price, its shares were up approximately 100% from the 52-week lows.

1-Year Price Chart (as on September 22, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 43.86% of the total shareholding. Briscoe (Robert John) and Jerry Zucker Revocable Trust hold the maximum interests in the company at 12.2% and 11.55%, respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to EBITDA based relative valuation metrics

*Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: Despite a lacklustre financial performance in the second quarter of 2020, an increasing insider buying in the company’s shares indicates that the management is quite bullish on the future performance of the business and accumulating stocks at the discounted price in the wake of COVID-19 led free fall took in March 2020. Further, the group’s shares have recorded a sharp recovery from its year’s bottom, which reflects a higher buying interest in the company. Moreover, the company has reduced its Net debt to CAD 63.0 million as compared to CAD 68.2 million at the end of the fiscal year 2019. Consequently, financial leverage stood at 2.3x, an improvement from 2.5x at the end of last fiscal year.

Further, on the daily price chart, its shares have registered a cross-over in September 21 trading session, as it cross-over its long-term crucial resistance level of 200-day SMA and managed to trade above it, which is a bullish signal. Also, this reflects that GCL shares have created a new long-term support level and entered into a long-term bull run.

We have valued the company using EV to EBITDA based relative valuation and arrived at a target price offering low double-digit upside potential (in % terms). Hence, considering the aforementioned facts, we have given a “Speculative Buy” recommendation on the stock at the closing price of CAD 0.40 on September 22, 2020).

*Recommendation is valid at September 23, 2020 price as well.

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Disclaimer

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