Canadian Natural Resources Limited

Canadian Natural Resources Limited (TSX: CNQ) is an independent crude oil and natural gas exploration, development and production company. The Company's exploration and production operations are focused in North America, mainly in Western Canada; the United Kingdom (UK) portion of the North Sea; and Cote d'Ivoire and South Africa in Offshore Africa.

Key Highlights 

• An Income play:The company maintained its dividend payment at a time when most of the businesses are cutting down or suspending their dividend distribution. This shows the group's financial strength. The group has a decent track record of dividend distribution, which shows the group’s ability to generate consistent cash flow. At the last closing price, the stock was offering a healthy yield of ~5.7%, which translates in an essential factor for regular income-seeking investors with a long-term horizon. 

• Generating healthy Cash Flows: The management took some prudent steps in the quarter, as a result of this the company generated approximately CAD 1.74 billion in adjusted funds flow and approximately CAD 467 million in free cash flow, after capital expenditures and dividend payments, reflecting the flexibility and strength of the group.

Source: Company

• Reduced net debt:On the back of a strong financial position in Q3 2020, the company managed to reduce its net debt by approximately CAD 1.1 billion, from Q2 2020 levels. This is a key positive point as it would reduce the interest cost pressure to some extent; hence the margins would improve.

• Ample liquidity:As on September 30, 2020, the company had significant liquidity of approximately CAD 4.2 billion, including committed and undrawn credit facilities, cash balances and short-term investments. We believe the current liquidity levels seems to be sufficient to carry the operations without any interruptions.

Financial overview of Q3 2020

Source: Company 

• In Q3 2020, the company reported revenue of CAD 4.5 billion, compared to CAD 6.1 billion in the previous corresponding period. The revenue decreased due to lower performance from the Oil Sands Mining and Upgrading segment.
• EBIT registered by the company in Q3 2020 stood at CAD 417 million, against CAD 1.36 billion in Q32019. The primary reason behind the low EBIT was high production cost along with lower revenues.
• The company reported net earnings of CAD 408 million, compared to CAD 1 billion in the previous corresponding period. The factors discussed above were the main reasons behind the lower net earnings. 

Risks associated with investments 

The company is exposed to various market risks in the ordinary course of operations that could impact its earnings and cash flows. Some important risk factors include lower demand, lower production, adverse weather conditions etc. 

Valuation Methodology (Illustrative): EV to Sales 

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

Stock recommendation

The group increased liquids production from the North America Exploration and Production assets in the reported quarter by approximately 20% from Q2 2020 levels to 494,952 bbl/d. It achieved record daily thermal in situ production of 287,978 bbl/d. The group achieved these results as it successfully executed curtailment optimization strategy while conducting planned maintenance and turnaround activities in its Oil Sands Mining and Upgrading segment. We expect the demand for oil & gas to improve in the foreseeable future, which would help the group in posting improved performance in the coming quarters. Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 29.60 on January 28, 2021. We have considered ARC Resources Ltd, Pembina Pipeline Corp, Crescent Point Energy Corp, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

 Restaurant Brands International Inc.

Restaurant Brands International Inc. (TSX: QSR) is a quick-service restaurant (QSR) company with approximately 27,000 restaurants in more than 100 countries and the United States territories. It owns three quick-service restaurant brands: Burger King, Tim Hortons and Popeyes. 

Key Highlights 

• Most of the restaurants reopened: As of the end of September, 96% of the group’s restaurants were open worldwide, including restaurants in North America, Asia Pacific and Europe, Middle East and Africa and approximately 92% of restaurants remained open in Latin America. With the increase in reopening of the stores, the company would likely to generate decent cash flows.

• Steady dividend distribution:Despite a challenging business environment, the group continues with dividend distribution. The company recently paid a dividend of USD 0.52 per unit payable on 5th January 2021. Moreover, at the last closing price, the stock was offering a dividend yield of 3.6%, which is decent amid a low interest rate environment.

• Ample liquidity:As of September 30, 2020, the company has cash and cash equivalents of USD 1.9 billion. Along with this the company had issued USD 1.4 billion of 4.0% Second Lien Notes due 2030 and redeemed USD 1.35 billion of 5.0% Second Lien Notes due 2025. With the current liquidity, the company would be able to fund its short-term capital requirements, which is a key positive. 

Financial overview

Source: Company 

• In Q3 2020, the company posted a revenue of USD 1.33 billion, against USD 1.45 billion in the previous corresponding period. The fall in revenue was primarily driven by a decline in system-wide sales at Tim Hortons and Burger King and a decrease in supply chain sales, partially offset by increased system-wide sales at Popeyes.
• Income from operations stood at USD 417 million, compared to USD 571 million in Q3 2019. The decrease in operating income was primarily due to lower income, partially offset by lower franchise and property expenses and lower SG&A expenses.
• The company reported net income of USD 223 million in the reported quarter, compared to USD 351 million in Q3 2019. The decrease in net income was primarily due to the reasons discussed above. 

Risks associated with investment

The company’s results can be adversely affected by unforeseen events, such as adverse weather conditions, natural disasters, pandemics such as the COVID-19, or other catastrophic events. The second wave of COVID-19 might lead to social distancing measures and store closures again, which could lead to lower royalty income for the company. 

Valuation Methodology 

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

Stock recommendation

The group's results in this quarter continued to be impacted by the COVID-19 global pandemic. Still, they continued to make progress on reopening stores that had been temporarily closed; this would support the revenues. Furthermore, they opened their 300th Burger King restaurant in Canada with the help of franchisee, Redberry Restaurants, which will be developing more than 100 new restaurant locations in the next five years. The company continues to make progress behind their long-term vision for the business, including modernizing brands by leveraging their recent built-in technology capabilities. The company is excited to roll out its digital drive-thru menu boards to over 10,000 Tim Hortons and Burger King restaurants in the US and Canada. Therefore, based on the above rationale and valuation, we have given a "Buy" rating at the closing price of CAD 75.0 as on January 28, 2021, with a higher double-digit (percentage term) upside potential. We have considered Domino's Pizza Inc, Mcdonald's Corp, Starbucks Corp, etc. as the peer group for the comparison.

Technical Chart (as on January 29^th, 2021). Source: Refinitiv (Thomson Reuters)

Kirkland Lake Gold Ltd.

Kirkland Lake Gold Ltd. (TSX: KL) is a Canada-based gold mining, development and exploration company with a diversified portfolio of exploration projects. The production profile of the company includes Macassa mine complex located in northeastern Ontario and the Fosterville gold mine located in the State of Victoria, Australia.

Key Highlights:

• Increased sales: The company recently released its FY20 production and sales number. The company reported a higher sale during both FY20 and Q4FY20, at 1,388,944 ozs and 371,009 ozs, respectively. This was significantly higher than 979,733 ozs, and 278,438 ozs, respectively in FY19 and Q4FY19. Notably, the group reported higher gold production of 1,369,652 ozs in FY20, as compared to 974,615 ozs in FY19. FY 20 Production was in line with the company’s guidance.

Source: Company Presentation

• Strong Year-to-Date Performance: In 9MFY20, the group reported a strong operational performance, wherein net earnings and free cash flow increased by ~42% y-o-y and ~52% y-o-y, respectively to USD 555.1 million and USD 500.6 million, respectively. The above growth indicates strong operational performance, aided by elevated demand for gold.

Source: Company Presentation

Q3FY20 Financial Highlights:

• KL announced its quarterly results, wherein the group posted revenue of USD 632.843 million, as compared to USD 381.430 million in the previous corresponding period (pcp).
• Earnings from mine operations stood at USD 388.632 million, higher than USD 255.644 million in the previous corresponding period (pcp). The increase was supported by higher revenue, partially offset by an increased production cost (USD 136.023 million versus USD 73.664 million in pcp), and a higher depletion and depreciation expense (USD 86.707 million versus USD 41.692 million in Q3FY19).
• Earnings from operations were reported at USD 319.550 million, significantly higher than USD 238.647 million in pcp. The quarter was marked by higher general and administrative expense (USD 20.409 million versus USD 10.559 million in pcp), a higher Care and maintenance (USD 14.256 million versus USD 0. 541 million in Q3FY19) along with an inclusion of rehabilitation costs amounting USD 32.626 million.
• Net earnings stood higher at USD 202.022 million, as compared to USD 176.604 million in Q3FY19. The increase was aided by higher earnings from operations, partially offset by an increased finance cost (USD 2.305 million versus USD 0.576 million in pcp).
• The group reported cash & cash equivalents of USD 848.524 million, while total assets were recorded at USD 6,838.732 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Volatility in the Gold prices would affect the company’s overall realization prices and might take a toll on the margins and cash flows.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

With the acquisition of Detour Gold on January 31, 2020, KL sees significant expansion potential and exploration upside, which is likely to add improved prospects in the coming quarters. The group reported higher financial flexibility in Q4FY20 and repaid USD 98.6 million of debt, related to the acquisition of Detour Gold and added USD 173.9 million of cash, which is impressive. The group is virtually debt-free, which suggest negligible balance sheet risk. We have valued the stock using Price to CF based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Yamana Gold Inc, Barrick Gold Corp, Alamos Gold Inc, etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 49.51 on January 28, 2021.

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

AltaGas Ltd

AltaGas Ltd (TSX: ALA) is a Canada-based diversified energy infrastructure company. It owns and operates a diversified basket of energy infrastructure businesses through four segments: Midstream, power, utilities and corporate.  Revenue is derived from customers in both Canada and the United States, with United States customers contributing the most.

Key highlights

• An Income play:Despite the challenging operating environment, the company maintained its dividend payment, which shows the group's financial strength. Recently, the company announced a monthly dividend of CAD 0.0833 per share payable on 15th February 2021, with a record date of 22nd January 2021. At the last closing price, the stock was offering a healthy dividend yield of 5.247%, which translates in an essential factor for regular income-seeking investors with a long-term horizon.

• The management's bullish stance: The management has presented an update on a strategic plan, introduces 2021 financial guidance, and increases dividend by 4%. The Company expects to earn Normalized EPS between CAD 1.45 – CAD 1.55 per share for FY 2021, which represents approximately 20% growth, along with Normalized EBITDA to be in a range of CAD 1.4 billion – CAD 1.5 billion, which represents about 12% growth, on year-over-year basis.

• Additional license to export:Recently, the Canada Energy Regulator (CER) granted an additional 25-year permit to export up to 46,000 Bbls/d of propane to North American and global markets, bringing the aggregate propane export capacity under 25-year export licenses to 92,000 Bbls/d.

• Investing in the utility segment:The company is investing in its aging infrastructure and attracting new customers. They expect to drive strong rate base growth of 8 - 10% annually through 2024. Since the utility segment is the most significant revenue contributor for the company and the revenues are generally highest in the first and fourth quarters as most of the natural gas demand occurs during the winter heating season.

Source: Company 

Financial overview of Q3 2020

Source: Company

• The Company reported Normalized EBITDA of CAD 213 million in Q3 2020, increased 23% against CAD 173 million in the previous corresponding period, reflecting strong execution and performance from the Utility segment.

• Normalized net income in Q3 2020 stood at CAD 12 million, compared to a normalized net loss of CAD 62 million in pcp. The improvement was mainly due to lower interest expense, partially offset by higher depreciation and amortization expense.

• Net loss applicable to common shares in this quarter was CAD 47 million, compared to net income of CAD 22 million in the previous corresponding period. The decrease was mainly due to higher unrealized losses on risk management contracts, higher depreciation, and amortization expense.

Risks associated with investment

The company is exposed to various market risks in the ordinary course of operations that could impact its earnings and cash flows. Some important risk factors are lower demand, lower production, adverse weather conditions etc. The company also enters physical and financial derivative contracts to manage exposure to fluctuations in commodity prices and foreign exchange rates. 

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock recommendation

The company has recently raised its guidance where the group expect to clock a healthy growth in EBITDA and EPS by 12% and 20%, respectively. This is a key positive point reflecting the strength of the operations the company will be having in FY21. As the utility segment is the biggest revenue contributor for the company, the group is investing in aging infrastructure and attracting new customers as it expects to drive strong rate base growth of 8 - 10% annually through 2024. On top of this, the dividend yield of more than 5% is the icing on the cake for long-term investors. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 19.05, on January 28, 2021. We have considered TC Energy Corp, Canadian Utilities Ltd, Superior Plus Corp, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Ero Copper Corp.

Ero Copper Corp. (TSX: ERO) is a base metals mining company, which focuses on the production and sale of copper from the Vale do Curaca Property in Brazil, with gold and silver produced and sold as by-products from the same.

Event Update:

The group would disclose its FY20 financial results on March 16, 2021.

Key Highlights:

• Improved copper productions: The company surpassed its FY20 production guidance 2,150,000 tonnes of copper from its MCSA Mining Complex and reported total tonnes processed of 2,271,625. However, copper recovery stood slightly lower at 90.5%, as compared to the guidance of 91%. For FY20, cash cost of MCSA mines was guided within the range of USD 0.70 and USD 0.85/lb. As far as the gold production is concerned, the group reported slightly lower tonnes processed at 162,642, as compared to the guidance of 165,000. Notably, gold recovery stood higher at 91.3%, versus the guidance of 90%.

Source: Company Presentation

• Better than Industry margins: The company reported improved operating performance during Q3FY20. ERO posted gross margin, EBITDA margin and operating margin at 63.2%, 65.9% and 54.8%, respectively in Q3FY20, as compared to the industry median of 51.4%, 44.1% and 54.8%, respectively. Moreover, the company posted a net margin of 33.3%, significantly higher than the industry median of 11.8%. The above margins indicate strong operational performance by the company, which is a key positive.

Q3FY20 Financial Highlights:

• ERO impresses with its quarterly results, wherein the group posted revenue of USD 94.328 million, significantly higher than USD 60.640 million in the previous corresponding period (pcp). The increase was driven by an increase in realized prices of both copper and gold.
• Gross profit soared to USD 59.605 million, from USD 21.309 million in Q3FY19, supported by higher sales and lower cost of product sold (USD 33.337 million versus USD 38.378 million in pcp).
• The quarter was marked by a slightly lower general and administrative expense (USD 6.186 million versus USD 6.360 million in pcp), a lower finance expense (USD 3.397 million versus USD 5.206 in pcp) and a slide in foreign exchange loss (USD 8.703 million versus USD 10.866 million in pcp).
• The group reported a surge in net income of USD 31.443 million, from USD 16.307 million in pcp.
• Cash and cash equivalents were recorded at USD 54.341 million, while total assets were recorded at USD 439.408 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Volatility in the commodity prices would affect the realization price and subsequently would impact the company’s margins and cash flows.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

The company carries industry-leading return on invested capital (ROIC), driven by strong returns from its operations during the last nine-quarters. Moreover, the group reported solid organic growth coupled with low-cost production. Within the gold exploration segment, the group recently reported one of the best, and deepest intersections drilled to date, which is encouraging. Also, at the last close, its shares traded above the 200-day SMA, indicating a bullish price trend. We have valued the stock Price to CF based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Hudbay Minerals Inc, Capstone Mining Corp etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 18.95 on January 28^th, 2021.

1-Year Price Chart (as on January 28^th, 2021). 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.