3 Top Picks for April 2022- HCG, CNE and JAG

Home Capital Group Inc. (TSX: HCG) is a Canada-based holding company that offers a varied portfolio of services covering commercial and residential mortgage lending, consumer lending, credit card services, and securitization of insured mortgage products.

Key highlights

• Strong FY21 numbers: On February 17, 2022, the company reported its Q4FY21 and FY21 results, wherein the Net Income grew by 39.3% in FY21 to CAD 244.7 million as compared to the CAD 175.7 million in FY20. The rise was pushed by the increase in Net Interest Income on securitized and Non- Securitized assets and loans to CAD 493.75 million in FY21 vs the CAD 474.83 million in pcp.  Further, the decline of provisions in Credit losses to CAD 36.5 million in FY21 from CAD 70.8 million in FY20 helped the Net Income to improved further. Below is the graphical representation of the EPS and return on equity garnered by the company in last four years.

      Source: Company presentation

• Increase in Asset Under Management (AUM) :For FY21, the total assets under management reported by the company increased to 3.9% to CAD 25.80 billion, including the CAD 5.66 billion of the mortgages which were accounted for off-balance sheet, as compared to the total asset under management of CAD 24.83 billion in FY20. The biggest chunk of its Assets push was from the increase in 27.5% of Mortgage originations which was reported at CAD 8.86 billion in FY21 vs CAD 6.9 billion in FY20. The rise in home demand, especially from the single-family residential units was one of the key reasons for the increase in the AUM and assessing the rising demand, the company can further leverage on the residential mortgage product to enhance its assets under management in coming quarters.

• Improved credit quality:For FY21, the company marked a reversal of 0.18% in its credit provisions to CAD 33.7 million which stood at a provision of CAD 34.1 million in FY20. The Net write-offs which is a percentage of gross loans were less than 0.01% in FY21 as compared to the 0.15% in FY20. The improved credit quality will help the company to lower its borrowing cost which will impact positively its Net Interest Margins in upcoming results.
  

Risks associated with investment

The company deals primarily in the mortgage lending business hence the key risk which lingers on its books is the credit risk, which could worsen the ability of the borrowers to pay the mortgages on time in case of any economic slowdown or rise in interest rates. Further, in the rising interest rates environment, the company faces the challenge of how efficiently it pass on the rates to its customers, and failing to do so can dent its Net Interest Income margins. 

Financial overview of Q4FY 2021 (Expressed in thousands of CAD)

Source: Company Filing 

• Net-Interest Income: The company reported a dip in its Net Interest Income by 2.0% to CAD 120.9 million in Q4FY21 vs the CAD 123.4 million in pcp. This dip was reported primarily from the fall in Net interest income from securitized assets to CAD 112.2 million in Q4FY21 vs CAD 118.3 million in pcp,  but this was partially offset by the improved Net interest income from securitized loans and assets to CAD 8.7 million vs CAD5.1 million in pcp.

• Total revenue: For Q4FY21, the total revenue was reported at CAD 134.3 million vs the total revenue of CAD 139.9 million in pcp. The decline was primarily attributable to the fall in its Non-interest income to CAD 13.3 million vs CAD 16.4 million in pcp which was from the decrease in the securitized income.

• Net Income:  For Q4FY21, the company reported Net Income of CAD 52.6 million vs the Net Income of CAD 55.3 million in pcp. The reported diluted earning per share stood at CAD 1.04 in Q4FY21 vs CAD 1.06 in pcp.
  

Valuation Methodology (Illustrative): Price to Book Value-Based

Analysis by Kalkine Group

 Stock recommendation

 The company performed well in FY21 by clocking 40% growth in the earnings per share for two consecutive years and attained 15.1% return on equity in FY21. With the assets under management growing and the positive outlook to target the Common Equity Tier 1 in the range of 14% to 15% which will further keep the borrowing cost of the company suppressed. On the valuation front, the stock is deeply undervalued on Price to Book value multiple as compared to its peers, suggesting much headroom for the stock to match the industry valuations.

On the technical front, the stock rallied from the lows of CAD 13.67 in March 2020 to the recent highs of CAD 46.92 on November 21 and sold off gradually. Currently, the stock didn’t pare much of its gains as compared to the other heavyweight. The prices still reflect the undervaluation of the stock, which can push the prices to the north as the two important trend confirming indicators, 200 DMA & 50 DMA is at the inflection point. Once the prices sustain above the two DMA’s, there is exist a probability of the stock to start afresh uptrend.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the last closing market price of CAD 37.93 on March 28, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing. We have considered NMI Holdings Inc., Provident Financial Services Inc.,  Northwest Bancshares Inc, etc. as the peer group for the comparison.

One-Year Technical Price Chart (as on March 28, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary:

Canacol Energy Ltd

Canacol Energy Ltd. (TSX: CNE) is a natural gas exploration and production company which operates across the Colombia region. 

Key Updates:

• Improved production: In FY21, the company reported its Natural gas and LNG production of 182,829 *MMscfpd, which is 7% y-o-y higher than 171,126 MMscfpd in FY20. The surge was drive by improved demand on account of gradual lifting of restrictions coupled with an increase in firm contracts sales due to certain off-takers taking less contractual downtime and less undelivered nominations.

*MMscfpd =million standard cubic feet per day

• Attractive dividend yield: The stock of CNE carries an annualized dividend yield of ~6.50%, which looks attractive considering the ongoing interest rate scenario. Moreover, the group distributed a higher dividend of USD 29.4 million in FY21, as compared to USD 20.5 million in FY20. This is impressive as most of the companies are lowering their dividend distribution in order to retain liquidity. On March 17, 2022, the company announced a quarterly dividend of  CAD .052 per share, payable on April 19, 2022.
  

• Robust margins: At the end of FY21, the company reported EBITDA margin and operating margin of 52.7% and 30.3%, respectively, as compared to the industry median of 43.2% and 23.3%, respectively. Pretax margin stood higher at 19% in FY21, as compared to the industry median of 14.1%. This indicates higher operational efficiencies, which is encouraging.
  

• Operational Update: The company reported that it’s natural gas sales stood at 188 million standard cubic feet per day during February 2022. The company is currently mobilizing to drill the Chirimia 1 sidetrack with the objective of reestablishing gas production from the Cienaga de Oro sandstone reservoir.

 Risks associated with the Investment:

The company’s operations are correlated with the international crude oil prices, while a voltility in the commodity prices would dampen the company’s overall realisation and cash flow.

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• CNE declared its full-year result, wherein the group posted total revenue of USD 5 million, surged from USD 278.8 million in FY20. The growth was driven higher Natural gas and LNG sales of 181,084 MMscfpd, up 6% on y-o-y basis.
• Total expenses stood higher at USD 0 million from USD 170.3 million in FY20. The quarter was marked by higher natural gas trading purchase costs, increase in operating expense and a surge in transportation expense.
• Income before income taxes was recorded at USD 0 million, stood below USD 77.3 million in FY20 due to increase in total expenses as mentioned above, coupled with an increase in net finance expense.
• The company reported a net profit of USD 15.1 million, as compared to a net loss of USD 4.7 million in FY20, due to a surge in income tax expenses (USD 43.8 million v/s USD 82.1 million in FY20).

    Valuation Methodology (Illustrative): EV to Sales based methodology.

Analysis by Kalkine Group

Stock Recommendation:

The corporation showcased a solid FY21 performance and posted adjusted funds from operations of USD 153.8 million, which is higher than USD 145.1 million in FY20. This is a key positive and indicates robust operational performance. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Advantage Energy Ltd, Parex Resources Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of CNE at the last closing price of CAD 3.20 on March 28, 2022.

One-Year Technical Price Chart (as on March 28, 2022). Analysis by Kalkine Group

Technical Analysis Summary:

Jaguar Mining Inc

Jaguar Mining Inc. (TSX: JAG) is a junior gold mining company based in Brazil that focuses on the acquisition, exploration, development, and operation of gold-producing properties.

Key Highlights

• Gaining momentum on Sequential basis: On a sequential basis, the company is gaining traction, with revenue, gross profit and net income all increasing, which is a significant positive. All of this demonstrates the company's strength and adaptability. This lovely voyage of FY 2021 is depicted in the graph below.

Source: Company Filing

• An income play: Given the strength of the business over the past number of quarters, improved cost structure, strong balance sheet and solid cash flows, the company has paid a consistent dividend. Recently, the company declared a quarterly dividend of CAD 0.4 per common share, payable on 31 March 2022. Moreover, at the last closing price of CAD 4.15 as on March 28, 2022, the stock offered a healthy dividend yield of 3.85%, which looks decent considering the current macros and interest rates.
  

• Healthy Cash Position and Working Capital: The company's cash balance was USD 40.3 million on December 31, 2021, compared to USD 38.9 million in pcp. While the working capital stood at USD 31.9 million, compared to USD 29.1 million as on December 31, 2020.
  

• Virtually Debt free balance sheet: The company is virtually debt free, with Debt-to-Equity ratio of 0.03x compared to industry median of 0.22x as on December 31, 2021. Moreover, the company’s long-term debt as a percentage of total capital stood at just 1.1%, significantly below the industry median of 13.5%, which implies no balance sheet risk associated with company.

• Trading at discounted valuations: The company’s shares are available at an NTM EV/EBITDA multiple of 2.7x compared to the sector (Basic Material) median of 4.8x. while on NTM Price to Cash Flow multiple the stock is trading at 4.0x compared to 4.6x. This implies that the shares are trading at deep discount against the sector. The stock is undervalued on multiple valuation parameters. The table below reflects the picture.

Risks associated with investment: The Company’s financial performance is mostly dependent on the price of gold, which directly affects their profitability and cash flow. Any drawdown in the gold prices would impact the group’s performance.

Financial overview of FY 2021 (In 000 of USD)

Source: Company Filing

• In FY 2021, the company’s revenue decreased 5% to USD 151.4 million, compared to USD 160.2 million in FY 2020, primarily due to an 8% reduction in the ounces sold from 91,853 ounces in 2021 to 84,638 ounces in the same period of 2021, partially offset by a 3% increase in average realized gold price from USD1,745/oz in 2020 to USD1,790/oz in 2021.
• On the back of higher operating cost in FY 2021, the gross profit declined to USD 60.0 million against USD 85.7 million in pcp.
• The company witnessed higher exploration cost in the reported period also in last year it gained from impairment reversal, as a result in FY 2021, the group’s operating income fell to USD 44.9 million compared to USD 86.9 million in pcp.
• Net income in FY 2021 stood at USD 34.1 million against USD 72 .2 million in pcp.

Valuation Methodology (Illustrative): EV to Sales based Valuation

*1USD=1.25CAD

Analysis by Kalkine Group

Stock recommendation

 On a sequential basis, the company is gaining traction, with increases in revenue, gross profit, net income, all of which indicate the company's strength and durability. We believe the company is fundamentally sound, with a strong balance sheet, a strong liquidity profile, and a profitability profile that is roughly comparable to those of its larger peers. Furthermore, the stock offered a healthy dividend yield of 3.85%, which looks decent considering the current macros and interest rates.

Also, given the elevated gold price as a result of heightened inflationary pressure, we expect fundamentals will strengthen further in the coming period. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of “JAG” at the last closing price of CAD 4.15 on March 28, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 28, 2022). Source: Kalkine, Analysis by Kalkine Group

Technical Analysis Summary

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.