Mainstreet Equity Corp.

Mainstreet Equity Corp. (TSX: MEQ), is a Canada-based real estate company, which is focused on the acquisition, redevelopment, repositioning, and management of mid-market rental apartment buildings.

Key highlights 

• Consistent asset growth: The Company is generating higher net asset value over the years, indicating constant appraisal in its assets over the year. Appraised value stood at CAD 2.18 billion in FY20 against CAD 2 billion in FY19.

Source: Company 

• Robust operating matrix: The company reported continued growth over the years, which indicated business resilience. In the recent past, due to lower consumer income and a rise in the unemployment rate, most of the real estate companies witnessed a decline in their rent collection along with shrinkage in the profitability. However, the group maintained a healthy rent collection of 99% in Oct 2020, along with healthy growth in other operating line items. 

Source: Company 

Financial overview

Source: Company 

• For FY20, the company posted rental revenue of CAD 147.7 million against CAD 135.6 million in FY19, mainly due to decreased concession expense and the continued growth of the Corporation’s portfolio as the average number of units owned by the Corporation increased by 7% over the year.
• Net operating income stood at CAD 93.03 million against CAD 86.3 million in FY19.
• Net profit posted by the company in FY20 was 68.5 million against 58.6 million in FY19. 

Risk associated with investment

Increase in the vacancy rate would lead to lower operating performance due to various economic reasons, lower consumer spending, higher unemployment rate, etc. 

Valuation Methodology (Illustrative): EV to Sales 

 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company maintained its operational performance despite a drastic fall in the rental market on account of Covid-19. Further, we believe with a gradual revival in the overall economy; the rental market is expected to recover in the foreseeable future. We have valued the stock using EV/SALES based relative valuation method and have arrived at a double-digit upside (percentage term). Hence, we recommend a “Buy” rating at the closing price of CAD 75.16 on December 14, 2020. For the said purpose, we have considered peers like Sienna Senior Living Inc, Boardwalk Real Estate Investment Trust, Storagevault Canada Inc, etc.

Source: Refinitiv (Thomson Reuters)

Killam Apartment Real Estate Investment Trust

Killam Apartment Real Estate Investment Trust (TSX: KMP.UN) is an open-ended mutual fund trust. The group specialized in the acquisition, management, and development of multi-residential apartment buildings and manufactured home communities (MHC).

Key Highlights:

• Resilient Operational performance: Despite the current economic downturn, the company maintained consistent performance in the recent past. Rent collection stood robust at 99.1% for the month of October 2020. The company reported a 5.2% rental rate growth on the regular unit turns during Q3FY20. The group witnessed a 1.8% rental rate growth during the quarter, driven by higher apartment revenue, which is a key positive.

Source: Company Reports

• Robust Financial Metrics: Over the years, the company reported strong financial growth, driven by growing the portfolio and expanding geographical presence through accretive acquisitions. During FY15 to FY19, the company reported a 12.5% CAGR in its total assets, while net operating income grew at 9.2% CAGR during the same time frame. Moreover, the corporation has lowered its debt component as percentage of total assets, which indicates improved operational performance.   

               

Source: Company Presentation

Financials:  

• For Q3FY20, the company reported 5.8% y-o-y growth in the property revenue at CAD 66.653 million.
• Net operating income grew by 5% on y-o-y to CAD 43.397 million.
• The group reported a lower net income at CAD 37.465 million, down 20% over Q3FY19. The decline was primarily attributable to a lower fair value adjustment on investment properties (CAD 14.718 million versus CAD 35.846 million in Q3FY19).

Q3FY20 Financial Highlights (Source: Company Reports)

Risk: The group might witness a fall in the rent collection amid the uncertainty created by COVID-19, which may take a toll on the company’s performance.

Valuation Methodology (Illustrative): Price to Earnings

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

The company maintains a conservative balance sheet approach and offers higher capital flexibility through its high-quality apartment portfolios which derived 33% of NOI from apartments built in the last ten years. The management is confident that its future distributions and maintenance capex would be funded through the operating cash flows, which is a key positive. The stock has closed above the crucial support levels of 30-days, 50-days and 100-days simple moving average (SMA), indicating a bullish price trend. We have valued the stock using P/E based relative valuation method and have arrived at a lower- double-digit upside (in percentage terms). For the said purposes, we have considered peers like Canadian Apartment Properties Real Estate Investment Trust, InterRent Real Estate Investment Trust etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 17.30 on December 14, 2020.

KMP.UN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

 

InterRent Real Estate Investment Trust

InterRent Real Estate Investment Trust (TSX: IIP.UN) is a real estate investment trust focusing on the acquisition, ownership, management, and repositioning of multi-residential properties. 

Key highlights 

• Steady occupancy rates along with rising average monthly rent: The group reportedoccupancy of 92.1% for September 2020, standing above the mark of 90%, which is encouraging considering the current economic condition. The average monthly rent across the portfolio for September 2020 also increased to CAD 1,302 per suite from CAD 1,248 in September 2019. The management also believes that when immigration and in-person University classes return to more normalized levels, strong rental demand would return.

• Healthy Financial stats:The group collected over 99% of residential rents in Q3 2020, and the current trend is also in line on a sequential basis. Based on healthy rent collection and increased average monthly rent, the group is maintaining robust financial health. It reported an increase in the Funds from Operations by CAD 1.2 million to 17.1 million in Q3 2020, holding a cash balance of CAD 38.5 million as on September,30,2020, besides the aggregate credit limit of CAD 292 million.

 

Financial overview of Q3 2020 (In CAD Thousands)

Source: Company 

• In Q3 2020, the company reported revenue of CAD 39.7 million, as against CAD 37.6 million in the previous corresponding period. The increase in revenue was primarily due to higher average monthly rent per suite at CAD 1302 from CAD 1248, a year ago. 

• Net income in Q3 2020, decreased by CAD 37 million and stood at CAD 32.5 million, as against CAD 69.4 million in Q3 2019. This difference was due primarily to a lower fair value gain on investment properties. 

Risks associated with investment

A fall in the consumer disposable income might lead to an increase in the deferred rent, which could take a hit on the company’s profitability. 

Valuation Methodology (Illustrative): Price to Earnings

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Strong cash flows and healthy rent collection rates have demonstrated the resiliency of the business. With strong demand anticipated, on factors such as international students and the government's revised increase in forecasted immigration, the group is focusing on long term rental growth and value creation. We have valued the stock using a PE-based relative valuation method and have arrived at a higher double-digit upside (percentage term). Hence, we recommend a "Buy" rating at the closing price of CAD 14.06 on December 14, 2020. For the said purpose, we have considered peers like Artis Real Estate Investment Trust, Killam Apartment REIT, etc. 

Source: Refinitiv (Thomson Reuters)

Morguard Corporation

Morguard Corporation (TSX: MRC) is a real estate company that acquires, owns, and develops properties in Canada and the United States.

Key Highlights:

• The company has managed to maintain its rent collection at 92.3% for the month of September 2020, which is impressive looking at the ongoing economic cycle.                 

                            

Source: Company Reports

• The company has ample liquidity CAD 688 million comprised of CAD 230 million in cash and CAD 458 million available under its revolving credit facilities, which seems sufficient to meet the near-term requirements.
• The Canadian economy is witnessing a revival, with job-markets continues to strengthen and indicates the gradual return of consumer and investor confidence. An economic recovery is likely to help the group in delivering a better performance.

3QFY20 Financials Highlights

• Total revenue stood lower at CAD 251.469 million compared to CAD 298.291 million in the previous corresponding period (pcp). The decline was primarily due to a steep decline from hotel revenues (CAD 21.780 million versus CAD 65.525 million in pcp) on account of social distancing measures and lower transaction on account of travel restrictions.
• The company reported a slide in the net operating income at CAD 130.268 million from CAD 150.059 million in Q3FY19.

Source: Company Reports

Risk: The office and retail segments reported higher vacancy levels in most Canadian cities due to the second wave of COVID-19. Continuation of the above trend would dampen the overall performance of the company.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock Recommendation:

The economic slowdown resulting from the pandemic has impacted the commercial real estate sector hard. Canada's economic recovery is expected in the second half of 2020 as local governments took a phased approach to reopen with caution. In the Retail segment, all of the company's enclosed malls are now open, and the vast majority of tenants are allowed to operate, which is a key positive. With the gradual reopening of shops and other commercial spaces, we expect an improved scenario for the second part of FY20. The stock closed above the crucial support levels of 20-days, 30-days and 50-days simple moving average (SMA), indicating a bullish pattern. We have valued the stock using Price to Earnings based relative valuation approach and arrived at a target price offering double-digit upside side potential (in % terms). We have considered peers like Killam Apartment REIT, H&R Real Estate Investment Trust etc. Considering the above-mentioned facts, current stock price movement, we give a ‘Buy’ rating on the stock at the current closing price of CAD 115.6 on December 14, 2020.

MRC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

 

Wesdome Gold Mines Ltd.

Wesdome Gold Mines Ltd. (TSX: WDO), is a gold producer engaged in mining and related activities including exploration, extraction, processing, and reclamation.

Key highlights

• Debt-free entity:The company has a strong balance sheet with a zero-debt component. Despite a capital-intensive business, the company is maintaining a zero-debt profile, which is commendable and reflects the operational resiliency and prudent management. As of September 30, 2020, the company is having a cash balance of CAD 74 million with working capital of CAD 59.2 million compared to CAD 32.6 million on December 31, 2019.
• Decent Free cash flows: The company generated CAD 3.2 million of free cash flow in Q3 2020, compared to CAD 9.2 million in Q3 2019. The decrease in free cash flow was mainly due to capex of CAD 20.9 million at Eagle River and Kiena in the quarter as compared to CAD 16.5 million in Q3 2019. along the higher mining taxes paid.

Source: Company

Financial overview of Q3 2020 (expressed in thousands of Canadian dollars)

Source: Company

• In Q3 2020, the company’s revenues increased by 20% to CAD 55 million, as against CAD 46 million in the previous corresponding period. The increase in revenues was primarily due to higher average realized price of CAD 2,532 per ounce, as compared to CAD 1,957 in Q3 2019.
• The company reported a net income of CAD 14.6 million in Q3 2020, as against CAD 12.4 million in the previous corresponding period. Net income increased mainly due to higher average realized price of gold, partially offset by Covid-19 costs, increased interest expense and other expenses.

Risks associated with investment

The Company’s financial performance is mostly dependent on the price of gold, which directly affects the profitability and cash flow. The price of gold is subject to volatile price movements.

Valuation Methodology (Illustrative): Price to Cash Flow

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The company delivered a robust performance in #QFYw0. The Company is optimistic and maintaining its production guidance of 90,000 – 100,000 ounces of gold for FY2020. We believe that average realized gold prices per ounce would continue to expand, which would lead to margin expansions. With a strong cash position of CAD 74 million, the company seems to have ample liquidity to meet the near-term requirement. We have valued the stock using Price/Cash Flow based relative valuation method and have arrived at a double-digit upside (percentage term). Hence, we recommend a “Buy” rating at the closing price of CAD 9.92 on December 14, 2020. For the said purpose, we have considered peers like K92 Mining Inc, Osisko Gold Royalties Ltd, etc.

Source: Refinitiv (Thomson Reuters)

 

Dream Unlimited Corp

Dream Unlimited Corp (TSX: DRM) is a leading developer of exceptional office and residential assets in Toronto, owns stabilized income generating assets in both Canada and the U.S., and has an established and successful asset management business.

Key Highlights

• Strong Insiders Buying: In the below chart, it is clearly depicted that insider buying was significantly strong after March 2020 free fall. For multiple times, insiders have used discounted price and valuation to increase the stake, which indicates that they are quite bullish on the company’s future performance. Also, it can be seen the insider’s buying has pushed the stock significantly higher from its year lows. Moreover, insiders have further increased their stake recently in November, which implies that the current market price is a good entry point for investors.

Insider’s Activity Over Past 1-Year. Source: Refinitiv (Thomson Reuters)

• Stock is Hovering in Bullish Zone: On the daily price chart, shares of DRM are hovering in a bullish price zone, with stock traded well above the crucial short-term as well as long-term support levels of 50-day and 200-day simple moving averages (SMAs). Further, the leading momentum indicator, MACD is rising with the difference between 12-day, and 26-day EMAs is positive, and MACD oscillator hovering above 9-day SMA signal line, which is another strong bullish indicator. Further, the average traded volume in the DRM counter is rising, and the stock has also rallied, implies that long positions are increasing.

Technical Price Chart (as on December 14, 2020). Source: Refinitiv (Thomson Reuters)

Q3FY20: Financial Highlights

Source: Refinitiv (Thomson Reuters)

• Recurring Segment: In the third quarter, recurring income segment generated revenue and net operating income of CAD 16.2 million and CAD 0.5 million, respectively, compared to CAD 31.5 million and CAD 13.2 million in the prior period.
• Development Segment: In the third quarter, development segment generated revenue and net margin of CAD 44.3 million and CAD 3.6 million, respectively, up by CAD 11.6 million and CAD 4.4 million from the prior year. The increase was primarily driven by higher acre sales volumes in Western Canada and the specific condominium occupancy mix relative to the comparative period.

Risk associated with investment

Declining recurring income could be a potential risk for the company as recurring income is important to the company’s business as it provides stable cash flows in order to fund company’s ongoing interest, fixed operating costs and dividends. Further, the group is exposed to change interest rate risk, forex risk and a next wave of virus outbreak. 

Valuation Methodology (Illustrative): Price to Earnings

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

Stock Recommendation

The company has made substantial advances throughout its business in 2020, despite the challenges presented by the COVID-19 pandemic. More importantly, the company has recorded a CAGR growth of above 20% in its book value over the last five years and revenue CAGR of 8.3% at the same time, which implies that business is growing decently. However, 2020 would be an exceptional year because of COVID-19 pandemic but the long-term growth catalysts are largely intact, with decent liquidity and asset portfolio. Also, a strong insider’s buying infusing a lot of confidence in the company’s future performance. Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 20.38 on December 14, 2020.

1-year Price Chart (as on December 14, 2020). Source: Refinitiv (Thomson Reuters)

 

Torex Gold Resources Inc.

Torex Gold Resources Inc. (TSX: TXG) is a Canada-based gold resource company.

Key Highlights

• The company reported an improvement in its financial performance during the third quarter of 2020, driven by record-high gold sold during the year and that too at a higher average realized gold prices. Revenue jumped about 30% on a YoY basis to USD 256.5 million, with record cash flow from operations at USD 173.3million and record free cash flow from operation at USD 124.2 million in the third quarter of 2020. Also, Net Income leapt up by ~120% to USD 60.3 million vs USD 27.4 million in the previous corresponding period.
• The company has utilized higher free cash flow to deleverage its balance sheet and bolstered financial health with repayment of USD 71.8 million debt in the quarter. At the end of the Q3FY20, total debt lowered to USD 155 million from USD 174.9 million reported at the end of December 2019. This implies that the company is using its free cash flow to bring down balance sheet risks.

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the company posted revenue of USD 256.5 million, increased by 29.4% as compared to USD 198.2 million in the previous corresponding period.

• In Q3 2020 the company posted a net income of USD 60.3 million, increased by 120% as against USD 27.4 million in the previous corresponding period, primarily due to higher average realized gold prices, partially offset by higher income tax expense.

Risk: The company’s performance is linked to gold prices. Volatility in the gold prices would weigh on the group’s performances.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation

The gold explorer exited the third quarter with robust performance led by higher gold prices coupled with record gold volume sale. Further, the company has reported solid margin expansion led by higher average realised gold prices. We believe, the company will continue to report solid performance in the coming quarters, as gold is still tilted towards the year’s high. Therefore, based on the solid performance, and valuation, we have a given a “Buy” recommendation at the closing price of CAD 18.51 on December 14, 2020 with lower double digit upside potential.

1-Year Price Chart (as on December 11, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

 

Vermilion Energy Inc.

Vermilion Energy Inc. (TSX: VET), is a Canada-based international energy company, which focuses on conventional and semi-conventional exploration and development projects. The group is primarily interested in light oil and liquids-rich natural gas.

 

Key highlights 

• Robust production Profile: The company’s production profile consistently improved since 2003. The company reported average production of 97,656 boe/day for the nine months ended September 30, 2020, reflecting a fall of 4% comparing the previous corresponding period due to the turmoiled economic scenario.

Source: Company

• Optimizing operation efficiencies: Over the years, the management has undertaken prudential steps to minimize their operating costs. This ongoing focus on efficiency has resulted in significant per-unit cost reductions. 

Source: Company 

Financial overview of Q3 2020 (In thousands of Canadian dollars)

Source: Company 

• In Q3 2020 the company reported consolidated revenues of CAD 274.8 million against CAD 391.9 million in the previous corresponding period. The decline in revenues was primarily due to a reduction in crude oil realized prices.

• The company reported a net loss of CAD 69.9 million in Q3 2020, compared to a net loss of CAD 10.2 million in Q3 2019. The decrease in net earnings was primarily driven by CAD 101.4 million of lower fund flows from operations due to lower realized prices, because of the impact of COVID-19 and the OPEC+ price war, and impairment charges of CAD 35.4 million.

 

Risk associated with investments 

As the company is in exploration business of oil and gas, hence the revenues are correlated to the oil prices. Any volatility in oil prices is likely to affect the group’s performance.

Valuation Methodology (Illustrative): Price to Cash Flow

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company expects its average production to be in a range of 94,000 boe/day to 96,000 boe/day, comprising 55% of crude oil and the remaining 45% from Natural gas. The company enjoys significant leverage to oil prices. An increase of USD 1/bbl will generate approximately CAD 20 million of incremental Free cash flow, and this is quite impressive keeping in view that the gradual reopening of the economic and industrial activities would drive the oil demand and the oil prices are likely to improve in the foreseeable future. We have valued the stock using Price/Cash Flow based relative valuation method and have arrived at a double-digit upside (percentage term). Hence, we recommend a “Buy” rating at the closing price of CAD 6.34 on December 14, 2020. For the said purpose, we have considered peers like Baytex Energy Corp, ARC Resources Ltd, Crescent Point Energy Corp, etc.

Source: Refinitiv (Thomson Reuters)

 

Ag Growth International Inc.

Ag Growth International Inc. (TSX: AFN) manufactures portable and stationary grain handling, storage and conditioning equipment which includes augers, belt conveyors, grain storage bins, grain handling accessories, grain aeration equipment and grain drying systems.

Management Update:

On December 02, 2020, the company announced the retirement of Gary Anderson from its Board of Directors. Gary Anderson is a co-founder of AGI and served as Chief Operating Officer.

Key Updates:

• Improved Operational Metrics: The company posted resilient operations over the years which resulted in growth in the trade sales and adjusted EBITDA, driven by robust demand for Farm products in the recent years coupled with deeper customer relationships and equipment cross-sales strategy.               

                              

Source: Company Presentation

• Impressive Outlook: The Management expects an improvement in planted acreage, driven by favourable weather for strong crop volumes across North America.  The recent launch of the company’s order programs within the farm products is expected to be boosted by restocking of inventories by the dealers. The management further anticipates that its Q4FY20 farm sales are likely to remain marginally higher than Q4FY19 levels.

Financials:

• AFN announced its quarterly results, wherein the company posted sales of CAD 408 million, higher than CAD 260.198 million in the previous corresponding period (pcp). The increase was driven by income growth contributed from all the geographic segments.
• Gross profit stood at CAD 46.855 million, as compared to CAD 65.510 million in Q3FY19, due to a significantly higher cost of goods sold CAD 234.553 million versus CAD 194.688 million in pcp).
• The company reported a higher net loss of CAD 12.261 million, as compared to a net loss of CAD 2.819 million in pcp.                            

                               

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company might witness several setbacks from extreme weather conditions which might dampen the demand for crop equipment and might impact the overall storage volumes.

Stock Valuation and Recommendation:

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

The stock of AFN gained ~14% in the last nine-months, due to a resilient sectoral outlook on account of stable harvest scenario. In the recent past, the company’s operational performance has been supported by the increased spend in infrastructure across North America geography, which is a key positive. The stock closed above the crucial support levels of 20-days, 50-days and 100-days simple moving average (SMA), indicating a bullish price trend. We have valued the stock using Price to CF based relative valuation approach and arrived at a target price offering double-digit upside side potential (in % terms). We have considered peers like Nutrien Ltd, Savaria Corp etc. Considering the above-mentioned facts, current stock price movement, we have given a ‘Speculative Buy’ rating on the stock at the current closing price of CAD 30.8 on December 14, 2020.

AFN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

 

Chorus Aviation Inc. 

Chorus Aviation Inc. (TSX: CHR) is a Canadian holding company which aims to deliver regional aviation to the world through its businesses. The company specializes in contract flying, maintenance, repair and overhaul and aircraft leasing solutions. 

Key Highlights:

• Despite the current economic turmoil, the company collected ~50% of lease revenue billed during the third quarter of FY20, which is encouraging looking at the current liquidity position of the airline companies.
• The company managed to report total liquidity of CAD 218 million, CAD 30 million higher than the previous quarter, which is a key positive considering the persisting tight liquidity scenario. We believe the above liquidity is likely to support the company’s near-term working capital requirements.

Financials:

• CHR declared its quarterly results, wherein the company posted operating revenues of CAD 196.438 million, reflecting a decline of 44.1% on y-o-y basis. The decline was primarily attributable to a lower air-traffic which resulted in a decrease in capitalization of major maintenance overhauls on owned aircraft.
• Operating income stood at CAD 35.389 million, lower than CAD 58.550 million in the previous corresponding period (pcp). The decline was due to a lower income, partially offset by a lower operating expense.
• Net income stood at CAD 20.458 million, lower than CAD 24.195 million in pcp.                   

                   

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: Continuation of the lower air-traffic is likely to impact the company’s top-line.

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock Recommendation:

 With the gradual increase of air travel in the recent past, driven by reopening of economies, the stock of CHR soared ~63% in the last three months. We believe, the company’s overall business prospects would improve driven by improved maintenance from airline players. The stock closed above its crucial support levels of 50-days, 100-days and 150-days simple moving average (SMA), indicating a bullish price trend. We have valued the stock using EV to EBITDA based relative valuation approach and arrived at a target price offering double-digit upside side potential (in % terms). We have considered peers like Air Canada, Cargojet Inc etc. Considering the above-mentioned facts, current stock price movement, we have given a ‘Speculative Buy’ rating on the stock at the closing price of CAD 4.13 on December 14, 2020.

CHR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

K-Bro Linen Inc

K-Bro Linen Inc (TSX: KBL), is a Canada-based owner and operator of laundry and linen processing facilities. The Company provides laundry and linen services to healthcare institutions, hotels and other commercial accounts.

 

Key highlights

• Stable and recurring revenue: The company has managed to report a stable and recurring revenue from the long-term contracts it has. The company has exclusive 5-10 year hospital contracts and 2-5 year hospitality contracts. Almost 57% of Canada-based revenue is secured under these contracts that extend to 2023 and beyond.

Source: Company

• Bullish stance of the Management:The management believes that the financial flexibility provided by its strong balance sheet will enable them to operate without disruption to their business model while maintaining its ability to serve the healthcare and hospitality sectors in Canadian and UK markets. The company expects to post an adjusted EBITDA margin before adopting IFRS 16 in the range of 12% to 16% for FY2020. Given the uncertainties regarding the general economic environment and the potential impact of the second wave of COVID-19, the margins under this range seem commendable. 

Financial Overview of Q3 2020

Source: Company

• In Q3 2020, the Company’s reported consolidated sales numbers decreased 24% to CAD 51.4 million compared to CAD 67.8 million in the previous corresponding period (pcp), primarily due to lower occupancy rates across the hospitality sector over COVID-19 pandemic.
• Net earnings posted by the Company decreased by CAD 1.2 million to CAD 3.4 million in Q3 2020, compared to CAD 4.7 million in Q2 2019.

Risks associated with investment

Since the company provides its services to the hospitality sector and commands a significant part of the revenue from it, the continuation of the travel ban is likely to impact the cash generation capacities of the business. 

Valuation Methodology (Illustrative): EV to EBITDA

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

During the quarter, as the healthcare volumes began to return to more specific numbers.  We believe the prospects for the group’s healthcare business remains firm. Also, with the easing lockdown restrictions, we expect a gradual recovery in the hospitality sector, which could support the overall performance of the company. We have valued the stock using EV/EBITDA based relative valuation method and have arrived at a double-digit upside (percentage term). Hence, we recommend a “Speculative Buy” rating at the closing price of CAD 37.01 on December 14, 2020. For the said purpose, we have considered peers like S CareRx Corp, Knight Therapeutics Inc, Savaria Corp, etc.

1-Year Price Chart (as on December 14, 2020). Source: Refinitiv (Thomson Reuters)

Acadian Timber Corp.

Acadian Timber Corp. (TSX: ADN), is a Canada-based supplier of primary forest products in Eastern Canada and the Northeastern United States. The Company operates timberland in New Brunswick and Maine.

Key highlights

• An income play: The company has a strong history of dividend distribution, which establishes the fact that the company’s business is resilient and has reported stable cash flows over the years. The company approved a quarterly dividend of CAD 0.29 per share, payable on January 15, 2021, with a record date of December 31, 2020. At the last traded price, the stock was offering a dividend yield of 7.12%, which is lucrative, looking at the current interest rate environment.

• Optimistic macro scenarios: The management expects that the demand of softwood sawlogs will increase in North American market in FY-2021, on the back of, lower interest rates and old, underbuilt housing stock with higher housing construction.

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the reported revenues of CAD 23.2 million, as against CAD 25.3 million in the previous corresponding period. The fall in revenues was mainly due to lower sales volume coupled with a lower weighted average selling price and sluggish demand for hardwood pulpwood.
• The company posted a net income of CAD 5.2 million in Q3 2020, as against a loss of CAD 10.8 million in Q3 2019. This rise in net income was due to gains on unrealized foreign exchange. 

Risk associated with investment

Sluggish demand for wood products might result in higher inventory levels, which might restrict the capacity utilization of the company. Furthermore, a continuation of the ongoing weak hardwood pulp demand might dampen the sales of the company. 

Valuation Methodology (Illustrative): Price to Cash Flow

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

On the back of product diversity, the group has able to retain operational performance in recent times, which is impressive. The demand for softwood sawlogs is likely to increase in the North American market in FY-2021, on the back of, lower interest rates and old, underbuilt housing stock with higher housing construction. This improving demand outlook is a big positive for the company. On top of all, the stock is offering a healthy dividend yield of 7.12%, which is impressive and can be a crucial factor for long-term investors. We have valued the stock using Price/Cash Flow based relative valuation method and have arrived at a double-digit upside (percentage term). Hence, we recommend a “Speculative Buy” rating at the closing price of CAD 16.3 on December 14, 2020. For the said purpose, we have considered peers like Resolute Forest Products Inc, Mercer International Inc, etc.

Source: Refinitiv (Thomson Reuters)

 

Exchange Income Corp

Exchange Income Corp (TSX: EIF), is a diversified acquisition-oriented corporation focused on opportunities in two sectors, aerospace, aviation services and equipment & manufacturing.

Key highlights 

• Healthy Balance sheet:Despite the fragile economic scenario, the Company managed to have a healthy balance sheet. The Company’s working capital position, Free Cash Flow, and capital resources remain healthy with no long-term debt coming due until December 2022. As of September 30, 2020, the group had a cash position of CAD 82.6 million and a net working capital position of CAD 339.8 million which represents a current ratio of 2.07x. Along with this, the company also hold a credit facility of approximately CAD 1.3 billion, increasing the corporation’s access to capital to make acquisitions, invest in its operating subsidiaries and provides the ability to weather economic downturns.

• An income play: The company has a strong history of dividend distribution, which establishes the fact that the company’s business is resilient and has reported stable cash flows over the years. The company approved a monthly dividend of CAD 0.19 per share, payable on December 15, 2021, with a record date of November 30, 2020. At the last traded price, the stock was offering a dividend yield of ~6.1%, which lucrative considering the current market dynamics and interest rates.

Financial overview of Q3 2020

Source: Company 

Risk associated with investment

A major part of the revenue is being derived from the aviation segment, and the restrictions imposed on account of the pandemic has caused a tremendous impact on the aviation segment. Continued pain in the aviation sector might hinder the group’s performance. 

Valuation Methodology (Illustrative): EV to Sales 

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The group witnessed an increase in passenger levels, off the initial lows, represents a glimpse of changing environment, which is positive for the company. The group’s diversity of operations has enabled it to manage through the pandemic with financial success. There Manufacturing segment, aviation government services, including ISR and medevacs, and cargo have been performing well through the crisis. From now on, the company would remain focus on the work in progress and on proper execution of the business strategies and plans to derive performance. We have valued the stock using EV/Sales based relative valuation method and have arrived at a double-digit upside (percentage term). Hence, we recommend a “Speculative Buy” rating at the closing price of CAD 37.26 on December 14, 2020. For the said purpose, we have considered peers like Chorus Aviation Inc, TFI International Inc, Heroux Devtek Inc, etc.

Source: Refinitiv (Thomson Reuters)

Corus Entertainment Inc.

Corus Entertainment Inc. (TSX: CJR.B) is a media and content company which operates in the diversified media industry and has two business segments, which includes television and radio.

Key Highlights:

• Recently, the company’s streamed service STAKTV offers broadcasting of twelve channels through Amazon Prime Video Channels. The above package offers strong entertainment contents for the audience and is expected to boost the company’s viewership’s in the foreseeable future.
• The company has a strong record of dividend payments and distributed CAD 50.399 million of dividend in FY20, higher than CAD 38.150 million in the previous year, which is commendable looking at the current scenario, where most of the businesses are suspending its dividend distribution in order to retain liquidity. At the last traded price, the stock was offering a dividend yield of ~5.6%, which is lucrative amid low interest rate scenario.
• The group reported a lower debt position at the end of the FY20 at CAD 1,429.750 million, as compared to CAD 1,655.406 million in FY19, which is impressive.

Financials: Q4FY20

• The group announced its fourth quarter FY20 results, wherein the company posted revenue of CAD 318.396 million, lower than CAD 377.479 million in the previous corresponding period (pcp). The decline was primarily due to slide in both Television and Radio income.
• Income before income taxes stood at CAD 46.255 million, increased from CAD 40.813 million in Q4FY19, thanks to a significantly lower direct cost of sales, general and administrative expenses (CAD 223.894 million versus CAD 267.703 million in pcp).
• Net income stood higher at CAD 33.790 million, as compared to CAD 28.526 million in pcp.
• The company reported cash and cash equivalent of CAD 45.900 million, while total assets were reported at CAD 3,970.882 million.

Q4FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to the extension of COVID 19 restrictions, the company might witness a hindrance in the service of the Company’s television, both across the digital and radio operations.

Stock Recommendation:

Despite the current economic slowdown coupled with falling viewership scenario, the company has managed to report a decent financial performance, and the new broadcasting strategy with Amazon prime video channels, the company is expected to deliver improved performance in the coming days. The stock of CJR.B gained ~14.48% and ~39% in the last six months and three-months, respectively and closed above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish trend. The stock trades at a lower valuation of EV to EBITDA of 4.5x on NTM basis, as compared to the industry (Media & Publishing) median of 7.9x. Hence, considering the aforesaid facts, trading levels, we give a ‘Speculative Buy’ on the stock at the closing price of CAD 4.27 on December 14, 2020.

1-Year Price Chart (as on December 14, 2020). (Source: Refinitiv, Thomson Reuters)

 

Gamehost Inc.

Gamehost Inc. (TSX: GH) operates in hospitality and gaming properties in Alberta, Canada. The company's reportable segments are strategic business units that offer different services like the Gaming segment, which includes casinos offering slot, VLT, lottery and table games.

Key Highlights:

• On December 09, 2020, Premier Jason Kenny announced the closure of all casinos effective December 12, 2020 at midnight to slow the growth in cases of COVID-19. We believe, the above announcement would likely to dampen the company’s top line in the near-term future. As per the announcement, the closure would extend for the next four weeks and post that be re-evaluation would be carried by the Government of Alberta. However, the company reported that it has ample liquidity to withstand the current working capital and capex requirements.
• The company is working on a 7,500 square foot expansion of gaming and non-gaming amenities at the Deerfoot Casino with expected completion in spring of 2021. 
• Due to full quarter operation in the third quarter of 2020, because of lifting restrictions, the company has recovered quite in the quarter.
• The stock is hovering in a bullish price zone, as it traded well above the crucial long-term as well as short-term support levels of 200-day, 50-day and 30-day SMAs. Also, the MACD is rising with the difference between 12-day and 26-day EMA is positive and MACD oscillator hovering above 9-day signal line, a bullish technical indicator.

Technical Chart. Source: Refinitiv (Thomson Reuters)

Financials: Q3FY20

• GH announced its quarterly results, wherein the company posted operating revenues of CAD 25.7 million, reflecting a decline of 49.3% on y-o-y basis. The decline was primarily attributable to the ongoing closure of games and casinos across the country.
• Net profit stood at CAD 3.5 million, lower than CAD 11.8 million in pcp.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Continued restrictions imposed by the government would weigh on the group’s performance and balance sheet positions as well.

Stock Recommendation:

The company’s performance was weak in the third quarter of FY20 as compared to the same quarter of the previous financial year. However, on a sequential-quarter basis the group’s performance was significantly higher with reported revenue of CAD 10.8M in Q3FY20 as compared to CAD 1.8M reported Q2FY20, EBITDA turned positive from negative EBITDA reported in the previous quarter. However, a new lockdown restriction could further have a weigh on the group’s performance. But it seems that market has already discounted two or three quarters of volatile performance that is why the stock has not corrected much, post the new lockdown measures are in place, and the stock has regained its momentum and managed to trade above the crucial short-term as well as long-term support levels of 200-day, 50-day and 30-day SMA, with MACD is rising and hovering above its 9-day SMA signal line. On the valuation front, the stock is available at forward P/E multiple of 10.8x against the industry median of 21.9x. Hence, considering the aforesaid rationale, we have given a ‘Speculative Buy’ rating in the stock at the closing price of CAD 6.0 on December 14, 2020, with lower double digit upside potential.

GH Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.