Suncor Energy Inc

Suncor Energy Inc (TSX: SU) is a Canada-based integrated energy company focused on developing Canada's petroleum resource basin, Athabasca oil sands. The Company operates in three business segments: Oil Sands, Exploration and Production (E&P), and Refining and Marketing.

Key highlights 

• The group targets CAD 2 billion incremental free funds flow by 2025: The management has shared the bullish stance with the significant planned maintenance activities where they continue to invest in assets to improve the efficiency of the business, reduce future operating and sustaining capital costs. This is likely to help them in achieving their CAD 2 billion incremental free funds flow target by 2025.

• Production outlook for 2021: The company released its 2021 corporate guidance which reflects its capital allocation framework and includes:

1. Average upstream production of 740,000 to 780,000 barrels of oil equivalent per day (boe/d)
2. Expected debt repayment in 2021 of between CAD 500 million and CAD 1.0 billion
3. Capex between CAD 3.8 and CAD 4.5 billion (sustaining capital of CAD 2.9 to CAD 3.4 billion which includes In Situ well pads)
4. CAD 500 million share repurchase program for the fiscal year 2021.

• Stable dividend distribution:Despite this challenging time when most companies are suspending their dividend distribution, the company paid a quarterly dividend of CAD 0.21 per share on its common shares on December 24, 2020. Moreover, at the last closing price, the stock was offering a decent dividend yield of 3.86% amid a low-interest-rate environment. 

Financial overview of Q3 2020 (In CAD millions)

Source: Company 

• In Q3 2020, the company reported CAD 6.4 billion revenue, as compared to CAD 9.8 billion in the previous corresponding period. The company undertook significant maintenance activities across its upstream and downstream assets in the third quarter of 2020, which resulted in lower production volumes and refinery utilization. Due to this, the revenue declined during the quarter.
• The company reported negative EBIT of CAD 237 million in Q3 2020 compared to positive EBIT of CAD 1.47 billion in Q3 2019, primarily due to above-stated reasons coupled with higher depreciation cost.
• In the reported quarter, the company reported Net Loss of CAD 12 million compared to CAD 1 billion in Q3 2019. 

Risks associated with investment

The company’s performance is related to the demand and price of crude oil. Any volatility in the crude oil prices or setback to demand would hamper the company’s performance. 

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock recommendation

The Company's physically integrated model's resilience has demonstrated again in the third quarter as it exited with over 95% refinery utilization. The group's Downstream business delivered reliable results, and the management is confident in the momentum and performance of the downstream business for the remainder of this year and into 2021. The interconnecting pipelines between Base Plant and Syncrude are nearing completion and will be commissioned in the fourth quarter. The group expect the bi-directional pipelines to enhance integration between these assets and to provide increased operational flexibility. Further, we believe that the resumption of industrial and manufacturing activities would boost oil and gas demand, which would be beneficial for the Company to liquidate their products. Therefore, based on the above rationale and valuation, we have given a "Buy" rating at the closing price of CAD 21.76 on December 30, 2020. We have considered Canadian Natural Resources Ltd, Imperial Oil Ltd, Pembina Pipeline Corp etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Imperial Oil Limited

Imperial Oil Limited (TSX: IMO) is one of Canada's leading integrated oil companies, focusing on upstream operations, petroleum refining operations, and the marketing of petroleum products.

Key Highlights:

• Bullish Technical Indicators: The stock of IMO has gained ~53% in the last nine months, due to a revival in the international crude oil prices, supported by improved demand dynamics. Further, the stock closed above the short-term and long-term support levels of 50-days, 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish trend.

• Stable Dividend Payout: Despite a sluggish macro environment, the company distributed a stable dividend payment to its shareholders, which is commendable. During 9MFY20, the company paid a total dividend of CAD 488 million, higher than CAD 465 million, a year ago. During FY16 to FY20, dividend per share recorded a CAGR of 11%, which is impressive. Moreover, at the last traded price, the stock was offering a dividend yield of 57%, which is decent considering the current interest rate environment.                                  

Source: Company Presentation

Q3FY20 Financial Highlights:

• IMO declared its third-quarter results, wherein the group reported total revenues and other income of CAD 5,955 million, lower than CAD 8,736 million in the previous corresponding period (pcp). The decrease in the top-line was majorly attributable to a decline in the West Texas Intermediate (WTI) prices, which averaged at USD 40.93 per barrel, as compared to USD 56.44 per barrel in Q3FY19.
• The group reported total expense of CAD 5,952 million, declined from CAD 8,182 million in the Q3FY19, primarily due to a lower cost for purchases of crude oil and products (CAD 3,634 million versus CAD 5,399 million in pcp) and lower production and manufacturing costs (CAD 1,246 million versus CAD 1,601 million in pcp).
• IMO reported its net income of CAD 3 million, as compared to CAD 424 million, a year ago.
• The company posted a cash balance of CAD 817 million, while total assets stood at CAD 39,382 million.                           

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s revenue is correlated to the prices of crude oil. Volatility in crude oil prices would impact the company’s top-line.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months 

Stock Recommendation:

The stock of IMO has performed well in the recent past and appreciated ~51% in the last three months, supported by improved commodity prices. As the overall economy coming back to normalcy, we expect a higher crude oil demand from the industrial and manufacturing segments, which would further support the company’s realization prices and margins. We have valued the stock using Price to CF-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Phillips 66, Exxon Mobil Corp Co etc.  Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 24.62 on December 30, 2020.

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

Kinross Gold Corporation

Kinross Gold Corporation (TSX: K) is engaged in gold mining and related activities, including exploration and acquisition of gold-bearing properties, the extraction and processing of gold-containing ore, and reclamation of gold mining properties. 

Key highlights

• Higher production outlook: The management is bullish on the gold outlook and announced a growing three-year production profile, which is expected to increase by approximately half a million ounces, or 20%, to 2.9 million Au eq. Oz. in 2023.

Source: Company

• Robust Free Cash Flow:The group delivered another strong quarter, generating robust free cash flow and a significant earnings increase. Strong free cash flows were partially offset by the cash used for the repayment and acquisition. The company’s mines continued to perform well as the management effectively controlled the operational challenges caused by the COVID-19 pandemic. Furthermore, the expected enhanced production along controlled cost would also derive strong free cash flow performance.

Source: Company

• Strong Liquidity and Financial Flexibility:The Company maintains a high-grade balance sheet with manageable debt profile. As on September 30, 2020, the group had cash and cash equivalents of USD 933.5 million, compared with USD 1.52 billion on June 30, 2020. The decrease was primarily due to the full repayment of USD750 million drawn from the Company’s credit facility. The Company had additional available credit of USD 1.56 Billion, along with a total debt of approximately USD 1.9 billion, of which USD500 million in senior notes are due in September 2021. At the end of the quarter, the company’s liquidity stood at USD 2.5 billion.

Source: Company

Financial overview of Q3 2020 (expressed in millions of United States dollars)

Source: Company 

• In Q3 2020 the Company produced 603,312 attributable Au eq. Oz compared with 608,033 Au eq. Oz. in Q3 2019. The slight decrease was mainly due to lower production at Paracatu, Maricunga and Kupol, primarily offset by increases at Fort Knox and Bald Mountain.
• The Company’s revenue increased by 29% to USD 1.13 billion, compared with USD 877.1 million in the previous corresponding period. Revenues increased primarily due to higher average realized gold price, which increased 30% to USD 1,908 per ounce.
• In Q3 2020, the Company reported a strong net profit of USD 241.6 million, compared with USD 60.8 million in Q3 2019 because of above-stated reason coupled with lower G&A expenses and lower exploration cost. 

Risks associated with investment

The company’s financial performance is mostly dependent on the price of gold, which directly affects the company’s profitability, margins and cash flows. The price of gold is subject to volatility. It is affected by various factors, such as the strength of the US dollar, Interest rates, Inflation rates, demand and supply, 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 expect 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.

The group delivered another strong quarter, generating robust free cash flow and a significant increase in earnings. Furthermore, the expected enhanced production along with controlled cost, would drive strong free cash flow performance. Therefore, based on the above rationale and valuation, we have given a "Buy" rating at the closing price of CAD 9.64 on December 30, 2020. We have considered Yamana Gold Inc, Alamos Gold Inc, SSR Mining Inc etc. as the comparison's peer group.

Source: Refinitiv (Thomson Reuters)

Domtar Corporation

Domtar Corporation (TSX: UFS) manufactures and distributes a variety of fiber-based products and operates through two reportable segments, namely pulp and paper and personal care.

Key Highlights

• Stable Cash flow from Operations: Despite the current slowdown, the company reported stable cash from the operation of USD 276 million for 9MFY20, at par with USD 282 million, a year ago. The above performance is decent, given the challenging market condition and, we believe that it would improve in the foreseeable future, aided by the gradual recovery in demand for the company’s products. Moreover, the company’s operations have been supported by the rollout of cost-savings programs. The company targeted a USD 200 million of cost savings for FY20, which looks promising.
• Strong Momentum from Personal Care Segment: The personal care segment has performed significantly well in the recent past, driven by strong traction from Europe and North America, backed by several new product launches. The company has started servicing and expanding its share of wallet with one of the company’s prominent customers within the U.S., which is a key positive.

Q3FY20 Financial Highlights:

• UFS declared its quarterly results, wherein the company posted sales of USD 1,124 million, as compared to USD 1,283 million in the previous corresponding period (pcp). The decrease was due to a considerably lower income from pulp and paper (USD 899 million versus USD 1,079 million in pcp), partially offset by an improved performance from personal care segment (USD 243 million versus USD 219 million in pcp).
• The company posted an operating loss of USD 136 million, against an operating income of USD 29 million in pcp. The company’s operating performance was dampened by a significantly higher operating loss from the pulp and paper segment (USD 140 million versus an income of USD 31 million in pcp).
• UFS reported a net loss of USD 92 million, against a net profit of USD 20 million in Q3FY19.
• The company reported higher cash and cash equivalent of USD 218 million, while total assets were recorded at USD 4,791 million.                    

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The pulp and paper segment might be impacted by business cyclicality, lower demand for value-added products.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The management mentioned that through its Kingsport mill, UFS would start the conversion to recycled linerboard and would-be operation by the end of FY22, which is expected to add value proposition for the company. Moreover, the company has signed an agreement with Voith to provide equipment & technical services for the Kingsport mill. The pulp market is expected to improve in Q4FY20, supported by better demand, maintenance outages and restocking in China. Personal Care will continue to benefit from higher usage, coupled with the positive impact of new customer wins. The company’s overall raw material costing is likely to remain stable in the quarter, while the company expects a reduction in the planned maintenance costs as compared to the previous quarter. We have valued the stock using Price to CF based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Resolute Forest Products Inc, International Paper Co etc.  Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 40.17 on December 30, 2020.

 1-Year Daily Price Chart (as on December 30, 2020). Source: Refinitiv (Thomson Reuters)

Winpak Ltd.

Winpak Ltd. (TSX: WPK) manufactures and sells a variety of packaging materials and related packaging machines. The packaging materials are used primarily for perishable foods, beverages, and healthcare applications. 

Key Updates:

• Margin Expansion and Profitability growth: Historically, the company reported a continuous increase in its EBITDA and EBITDA margin, which is a showcase of prudent product pricing and improved operational efficiency. From FY09 to FY19, the company registered an 8% CAGR in EBITDA, which is commendable. During the FY19, the company reported a 1.3% increase in the volumes, which is encouraging. We expect the above trend to continue, as most of the companies are emphasizing on customized packaging in order to stay in the competition. Furthermore, the company’s margin has been supported by falling raw material prices.

Source: Company Presentation                 

Source: Company Presentation

• Positive Outlook: WPK's product pipeline remains very strong, and the company secures several business opportunities through organic and inorganic sales growth. The management hinted of several product launches in the fourth quarter of FY20, which includes retort pet food tray and dessert custom container offerings, spouted pouches etc. We expect the above launches would likely to support the sales in the coming quarters. The management stated that specialty beverage cup business should no longer be a headwind to Winpak's volumes going forward on comparison to prior year quarterly time periods. The lidding product group experienced slight volume gains with the specialty beverage die-cut lids.  The packaging machinery segment remains very dynamic with a strong machine order backlog which will keep it busy entering 2021. 

Q3FY20 Financial Highlights:

• WPK announced its quarterly results, wherein the company reported revenue of USD 210.605 million, versus USD 212.734 million in Q3FY19. The marginal decline was primarily due to sluggish performance from restaurants and food service segments on account of reopening restrictions instituted across North America. However, the overall sales volumes have been supported by improved pantry stocking.
• The company reported gross profit of USD 66.002 million, as compared to USD 67.115 million in the previous corresponding period (pcp). The marginal decline was due to a subsequent fall in quarterly revenue.
• Income from operations was recorded at USD 37.792 million, slightly lower than USD 38.197 million in Q3FY19, due to a lower gross profit, combined with an increase in the sales, marketing and distribution expense. The decline was partially offset by a lower general and administrative expenses.
• WPK reported a net income of USD 27.372 million, versus USD 29.462 million, a year ago. The decline was primarily due to a significant fall in the finance income (USD 0.388 million versus USD 2.175 million in pcp), partially offset by a lower finance expense (USD 0.513 million versus USD 0.811 million in pcp).
• The group posted cash and cash equivalent of USD 485.986 million, while total assets stood at USD 1,303.640 million.                              

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The second wave of the novel virus may dampen the demand of the group’s offerings, especially from the restaurant and foodservice segment. 

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation:

The stock of WPK has closed above the near-term and long-term support levels of 20-days, 30-days, 50-days and 200-days simple moving average (SMA), indicating a bullish trend. Further, the company has debt-free balance sheet with ample liquidity of USD 486 million supported by robust cash flows. We have valued the stock using P/CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like CCL Industries Inc, Aptargroup Inc etc. Hence, considering the aforementioned facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 43.58 on December 30, 2020.

1-Year Daily Price Chart (as on December 30, 2020). 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.