Real Matters Inc

Real Matters Inc (TSX: REAL) is a Canadian network management services provider for the mortgage lending and insurance industries. The company help its clients in making intelligent decisions about real estate by leveraging technology to deliver better quality, transparency and efficiency.

Key highlights

• Achieved Fiscal 2021 targets before time: At the end of fiscal 2020, the company reached or surpassed three of its four fiscal 2021 targets. These accomplishments reflect how prudently the company is managing its operations. 

Source: Company

• New Fiscal 2025 Performance Targets: The company is setting the following new targets through the end of fiscal 2025. These targets include a bifurcation of U.S. Appraisal market share between purchase and refinance and A refinance only target for the US Title, as the purchase and refinance markets each have distinct market factors that drive growth.

Source: Company

• The US Appraisal segment is the most significant contributor in terms of revenues; more than 62% of revenue is derived from this segment. The company witnessed higher market volumes and new client additions in this segment which has resulted in Net Revenue and Adjusted EBITDA margin expansion. Since 2017, Net Revenue CAGR is 26.2% and Adjusted EBITDA CAGR is 90.8%, as compared to estimated market volumes that increased at a CAGR of 2.6% only.

Source: Company

• The company purchased 50 thousand shares under normal course issuer bid (“NCIB”) at the cost of USD 0.91 million. Subsequent to quarter-end, the group purchased 518,000 shares at the cost of approximately CAD 11.9 million. It shows the confidence and optimism of management in the business.

• The Company’s Board of Directors announced that Jason Smith had been appointed Executive Chairman of Real Matters and Brian Lang, the current President and Chief Operating Officer, has been named Chief Executive Officer of the Company. 

Financial overview of Q4 2020 (In USD)

Source: Company

• In Q4 2020, the company posted consolidated revenue of USD 124.4 million, increased by 16%, as compared to USD 107.3 million in the previous corresponding period, primarily due to rise in market share, new client additions and higher market volumes.

• As a result of strong operating performance, consolidated adjusted EBITDA rose to USD 22.2 million, increased by 57.5%, as compared to USD14.1 million in Q4 2019.

• Net income reported by the company in Q4 2020, stood at USD 12.7 million, increased by 59%, as compared to USD 8 million in the previous corresponding period. The increase was primarily due to higher Adjusted EBITDA contributions from all three operating segments, market share gains, new client additions and higher market volumes.

Risks associated with investment

Residential mortgage volume in North America is a crucial driver for the company’s financial performance, and cyclical trends and seasonality influence this. There are many other risks which can affect the group’s business and financial performances. Some of them can be classified as interest rates, refinancing rates, the capacity of lenders to underwrite mortgages, house prices, housing stock supply and demand etc. 

Valuation Methodology (Illustrative): Price to Cash Flow 

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

Stock recommendation

The company registered higher market volumes and new client additions in the US Appraisal segment, which resulted in Net Revenue and Adjusted EBITDA margin expansion. Along with this, the company is also targeting to double the market share of the US Appraisal segment by FY2025. The company is continuously buying its share under NCIB; this showcases the confidence and optimism of management in the business. The company ended the quarter with cash and cash equivalents of USD 129.2 million, an increase of USD 57.5 million from 30th September 2019.

Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 20.03 on November 27, 2020. We have considered CGI Inc, Descartes Systems Group Inc, Open Text Corp, etc. as the peer group for the comparison.

Daily technical chart. Source: Refinitiv (Thomson Reuters)

Torex Gold Resources Inc

Torex Gold Resources Inc (TSX: TXG) is an intermediate producer of gold and other precious metals, engaged in the exploration, development, and exploration of its wholly-owned Morelos Gold Property, located in the prolific Guerrero Gold Belt in southern Mexico and consists of approximately seven mineral concessions covering a total area of over 29,000 hectares.  

Key highlights

• Record gold sold:In Q3 2020 the Company reported gold production of 131,790 ounces, which is the second-highest quarter of production ever from its El Limón Guajes (ELG) operations. The company sold record 133,030 ounces of gold at an average realized price of USD 1,880 per ounce. We expect the gold prices to remain higher in the near term on account of the sluggish economic outlook, which would help the Company in reporting improved financial performance.  

• Solid cash position:At the end of Q3 2020, the Company maintained its strong liquidity position with a cash balance of USD 204 million, which excludes short-term investments of USD 32.0 million, compared to a cash balance of USD 161.8 million at December 31, 2019. The increase in net cash is mainly due to the rise in the average realized price of gold.

• Record cash flow from operating activities: In Q3 2020, the company managed to generate record cash flow from the operation of USD173.3 million, as against USD 122.5 million in Q32019. Free cash flows for the quarter totalled USD 124.2 million. 

• Appointment of new Chief Financial Officer: On 25th November 2020, the managementannounced the appointment of Andrew Snowden as the Company’s Chief Financial Officer (“CFO”) effective 4th January 2021. Andrew will be replacing Steven Thomas, who will be stepping down from Torex effective 31st December 2020. 

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. The increase in revenue is primarily due to higher average realized prices per ounce. The average realized price was USD 1,884 per ounce in Q3 2020 as against USD 1,478 per ounce in Q3 2019.

• The Company posted Cost of sales of USD 153.5 million in Q3 2020, as compared to USD 130.1 million in the previous corresponding period, primarily due to higher depreciation and amortization. Depreciation cost escalated to USD 67.5 million as against USD 53.5 million.

• 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 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. It is affected by numerous factors, such as the strength of the US dollar, supply and demand, interest rates, and inflation rates, all of which are beyond the Company’s control.

Valuation Methodology (illustrative): Price to Cash Flow

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

Stock recommendation

We are bullish on the gold prices and believe that despite a little pullback, gold, as an asset class would continue to remain in the limelight as uncertainty over the global economic growth is still prevailing. We believe that average realized gold prices per ounce would continue to expand, which would lead to margin expansions. Therefore, based on the above rationale and valuation done using the above methodology, we have given a ‘Buy’ rating at the closing price of CAD 18.0 as on 27 November 2020. We have considered Teranga Gold Corp, New Gold Inc, Centerra Gold Inc, etc. as the peer group for the comparison.

Daily technical chart. Source: Refinitiv (Thomson Reuters)

SmartCentres Real Estate Investment Trust

SmartCentres Real Estate Investment Trust (TSX: SRU.UN) is one of Canada’s leading fully integrated REITs, with a best-in-class portfolio featuring 166 strategically located properties in communities across the country. The company has CAD 10.4 billion in assets and owns 33.8 million square feet of income producing value-oriented retail space.

Key Highlights:

• Revival in rent collection: Most of the real estate companies witnessed a slide in the rent collection during the first half of FY20, due to the ongoing pandemic which resulted in job losses and lower consumer income. However, with the gradual revival of the economy and opening of the trade relations across the major countries, the company have witnessed a recovery in the overall rental space, which is a key positive. We expect the momentum to continue in the coming days which would support the company’s cash flows.

Source: Company Presentations

• Impressive Product-pipeline: The company has impressive pipeline of development properties across Transit City 1 & 2 condo units, Transit City 3 condo unit, Vaughan Northwest Townhouse closings etc. These projects offer latest amenities and services for its tenants and are expected to provide additional revenue, fund recurring income initiatives, strengthen earnings levels to the organization post FY23.

Source: Company Presentations

• An Income Play: The company has a consistent track record of dividend payment over the past years. The company declared a monthly distribution of CAD 0.15417 per trust unit, payable on December 15, 2020. At the last traded price, the stock was offering a dividend yield of 7.6%, which is lucrative amid the low-interest rate environment.

Q3FY20 Financial Highlights:

• The group announced its quarterly results, wherein the company posted net rental income and other of CAD 113.185 million, as compared to CAD 126.484 million in the previous corresponding period (pcp).
• The quarter was marked by higher general and administrative expense (CAD 7.665 million versus CAD 4.604 million in Q3FY19) and a higher interest expense (CAD 37.506 million versus CAD 33.928 million in pcp). Meanwhile, the operations were supported by higher earnings from equity accounted investments amounting CAD 33.880 million, against CAD 0.543 million in pcp.
• Net income and comprehensive income stood at CAD 111.033 million, as compared to CAD 95.138 million in Q3FY19.
• At the end of the quarter, the company reported its cash and cash equivalents of CAD 425.679 million, while total assets stood at CAD 10,365.651 million.            

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The organization might witness setbacks from the lower value of investment properties, fall in the occupancy rate etc., which might affect the company’s overall performance.

Valuation Methodology (Illustrative): P/E based valuation

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

Stock Recommendation:

The company witnessed an improvement in the rent collection in the past few months which is encouraging. The company has a decent project pipeline, which is likely to support the future cashflow of the company. With the gradual lifting of the COVID-19 related restrictions, we expect the group’s performance to improve. Further, the group is offering a decent dividend yield, which is encouraging from an income investor’s point of view. We have valued the stock using P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like First Capital Real Estate Investment Trust, CT Real Estate Investment Trust etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 24.25 on November 27, 2020.

Daily technical chart (Source: Refinitiv, Thomson Reuters)

H&R Real Estate Investment Trust

H&R Real Estate Investment Trust (TSX: HR.UN) is a real estate investment trust principally involved in the ownership of properties in Canada and the US. The Trust’s primary objective is to maximize the value of units through active management of its assets and to provide unitholders with stable and growing cash distributions generated by revenues derived from a diversified portfolio of investment properties.

Key highlights 

• Investment Grade Tenant Base: High-quality and long-term leased office portfolio helped the group to derive strong rent collection, along with the healthy profile of the tenant base. The group’s 85.3% of revenue is coming from investment-grade rated tenants. 

Source: Company

• Well-diversified portfolio: The groupis one of Canada’s largest real estate investment trusts with total assets of approximately CAD 13.3 billion on September 30, 2020. The group has ownership interests in the North American portfolio of high-quality office, retail, industrial and residential properties comprising over 40 million square feet, making it well diversified in segments as well as in geography. Office and retails are the most significant segments of the group.

Source: Company

• An Income Play: The group has a decent track record of dividend payment. The company announced a monthly dividend of CAD 0.058 per common share payable on 6^th January 2021, with a record date of 21^st December 2020. At the last traded price, the stock was offering a dividend yield of 4.81%, which is lucrative considering the current interest rate environment.

• Ample Liquidity: The group has liquidity of CAD 1.0 billion of unused borrowing capacity available under its lines of credit along with CAD 54.4 million of cash on hand and an unencumbered asset pool of approximately CAD 3.5 billion as on 30th September 2020.

Financial overview of Q3 2020

Source: Company 

• In Q3 2020 the company’s reported rental income stood at CAD 271.6 million as compared to CAD 281.6 million in Q3 2019. The decline was mainly due to net disposition activity over the previous 21 months.
• Same-Asset property operating income in Q3 2020 also declined to CAD 176.2 million as compared to CAD 186.5 million in the previous corresponding period, due to provision for bad debts taken as a result of the impact of COVID-19, which predominantly impacted the group's retail segment.
• The group reported net income of CAD 247.8 million, increased by CAD 178.5 million, as against CAD 69.3 million in Q3 2019, primarily due to fair value adjustments on real estate assets and financial instruments.

Risk associated with investment

The company is exposed to various risks which include changes in government regulation and oversight, changes in consumer preferences, fluctuations in occupancy levels and business volumes, competition from other players, changes in neighbourhood or location conditions and general economic conditions.  

Valuation Methodology (Illustrative): Price to Earnings 

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

Stock recommendation: The company has a resilient business model and reported impressive rent collection rate of 93% in Q3 2020, and 95% in October. Further, the company is well-diversified with total assets of approximately CAD 13.3 billion on September 30, 2020. The group’s River Landing project, an urban in-fill mixed-use development site in Miami, Florida will be fully operational soon, which is likely to help in delivering improved business performance. Further, in coming quarters, we expect an improvement in the rent collection along with a decline in provisions, which would further support the overall performance of the company. Therefore, based on the above rationale and valuation done using the above methodology, we have given a ‘Buy’ rating at the closing price of CAD 14.35. We have considered Allied Properties Real Estate Investment Trust, Artis Real Estate Investment Trust, Dream Office Real Estate Investment Trust, etc. as the peer group for the comparison.

Daily Price Chart (as on November 27, 2020). Source: Refinitiv (Thomson Reuters)

George Weston Limited

George Weston Limited (TSX: WN) is a holding company which operates through three subsidiaries encompassing retail, real estate, and consumer goods. The first is Loblaw, the largest grocer in Canada, in which it has a 52% controlling stake. The second is Choice Properties, an open-ended real estate investment trust, where George Weston's ownership of ~63%.

Key Highlights:

• Ample Liquidity: The company reported the available liquidity of CAD 3.8 billion for the Loblaw company, while Choice Properties reported CAD 1.5 billion of available liquidity under its committed credit facility, which seems sufficient to mitigate the current challenging operating environment. Furthermore, the company does not have any significant debt-maturities in the foreseeable future, which augers well for maintaining the liquidity level.

• Improved Prospects from Retail Segment: The company derived the majority of its income from the retail segment, and we believe improved traction from the above segment due to the gradual revival of the overall economy and increase in consumer expenditures.

Q3FY20 Financial Highlights:

• WN announced its quarterly results, wherein the company reported a 6.5% y-o-y higher revenue of CAD 16,209 million. The improvement was driven by growth from the company’s retail segment, partially offset by a lower sale within the Weston Foods on account of COVID-19 pandemic.
• Operating income stood at CAD 983 million, as compared to CAD 884 million in Q3FY19, supported by a higher income, partially offset by an increase in the cost of inventories sold and selling, general and administrative expenses.
• Adjusted EBITDA increased to CAD 1,715 million, up 3.3% on y-o-y primarily due to an increase in Loblaw and certain one-time gains, partially offset by a decline in Weston Foods driven by the impact of COVID-19 and increase in input costs.

Q3FY20 Financial Metrics (Source: Company Reports)

• Net earnings soared to CAD 498 million, as compared to CAD 264 million in the previous corresponding period.
• Cash and cash equivalents stood at CAD 2,436 million, while total assets were recorded at CAD 47,834 million.

Q3FY20 Income Statement (Source: Company Reports)

Risk: The group is battling with higher operating costs, which has affected the margins of the company, and continuation of the above trend is likely to impact the overall performance. Furthermore, the company’s retail segment and the real estate business might report lower traction due to the extension of COVID-19 restrictions.

Valuation Methodology (Illustrative): P/E based valuation

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

Stock Recommendation:

The company’s food segment reported an improvement as food retailers began to reopen bakery display cases coupled with Government mandate of the gradual reopening of dine-in restaurants across the major regions, which is a key positive. We believe, the momentum to continue, as the customers began to visit restaurants and food-stores more frequently. We have valued the stock using P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Empire Company Ltd, Metro Inc etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 97.50 on November 27, 2020.

Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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.