Turquoise Hill Resources Ltd.

Turquoise Hill Resources Ltd. (TSX: TRQ) is a global mining company that primarily mines copper, gold, and coal in the Asia-Pacific region.  The company holds a 66% interest in Oyu Tolgoi, one of the world's largest copper-gold-silver mines, which ships concentrate to customers in China.

Key Updates:

• Industry Beating Margin profile: The company commands a higher margin than its peers, which indicates better expense management. Gross margin and EBITDA margin stood significantly higher at 66.1% and 63.8% in Q1FY21, as compared to the industry median of 48.7% and 38.9%, respectively. The group reported a higher operating margin of 54.7% compared to the industry median of 24.60%.           

• Strong Operational performance from Oyu Tolgoi: The group operates through its Oyu Tolgoi mine, which has one of the largest gold and copper deposits. The group reported an elevated production from this mine in the recent quarters. Moreover, the company reported a declining cash cost, which is impressive and supported the company’s profitability.                         

Source: Company Presentation

• Exploration Update: The company is conducting exploration activities across the South Gobi region, which is located near northern China and Southern Mongolia. Moreover, the group has successfully tendered for a new license named Khatavch. With the inclusion of the above license, the group holds three exploration licenses till date. The company is likely to conduct exploration activities across the three regions in FY21. Notably, the group reported the progress from its Underground development across 3.5 eq. km and executed 13.5 thousand cubic metres of mass excavation.

Q1FY21 Financial Highlights:

• TRQ announced its quarterly result, wherein the company posted revenue of USD 526.546 million, increased 302.8% from USD 130.659 million in the previous corresponding period (pcp). The tremendous surge was supported by strong momentum from all the company’s segments driven by improved average commodity prices and increases in both copper and gold production. Copper production increased 29.0% whilst gold production increased 461.5% from Q1 2020.
• Gross margin turned positive and stood at USD 370.902 million, as compared to a loss of USD 15.265 million in pcp.
• The quarter was marked by a higher operating expense, an increase in corporate administration expenses due to a simultaneous rise in
• The group reported a net profit of USD 332.149 million, surged from USD 18.956 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Volatility in the commodity prices would affect the realization price for the company and may hinder the company’s overall performance.

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendations:

For FY21, the group expects its Oyu Tolgoi mine to produce approximately 150,000 to 180,000 tonnes of copper and 400,000 to 480,000 ounces of gold. The group is well placed on utilizing the exploration opportunities coming from any region. The group has reported better operational practices, which resulted in higher throughput since 2014, which is a key positive. Notably, in Q1FY21, the company reported a Mill throughput of 109 kt/day, higher than 104.3 kt/day in Q4FY20. For FY21, the group expects its throughput at higher than 105,000 tonnes per day. 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) upside. For the said purposes, we have considered peers like BHP Group Ltd, Hudbay Minerals Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 20.85 on June 29, 2021.

One-Year Technical Price Chart (as on June 29, 2021). Analysis by Kalkine Group

First Capital REIT

First Capital REIT (TSX: FCR.UN) is a leading owner, operator and developer of mixed-use real estate located in Canada's most densely populated cities. First Capital's focus is on creating thriving urban neighborhoods to generate value for businesses, residents, communities and our investors.

Key highlights 

• Healthy portfolio occupancy rate:Due to tenant closures (97,000 sf) surpassing new tenant possessions (44,000 sf) and the ultimate transfer of some development assets to the operational portfolio, the company's portfolio occupancy rate fell 0.4% to 95.8% in Q1 2021, down from 96.2% in Q4 2020. Although the company's occupancy rate decreased somewhat, it maintained a respectable level of above 95% despite the difficult circumstances, demonstrating the company's resiliency.
  

• Rising lease renewal rate:In Q1 2021, the company completed 450,000 square feet of lease renewals across the portfolio. It achieved 10.4% increase in lease renewal rate, comparing the rental rate in the last year of the expiring term versus the average rental rate over the renewal term. Due to rent escalations and renewal lifts, the average rental rate per occupied square foot for the entire portfolio increased by 0.5% from CAD 21.89 on December 31, 2020, to CAD 21.99 on March 31, 2021.
  

• Increase in adjusted cash flow from operations: In Q1 2021, the company’s reported “ACFO” totaled CAD 42.6 million compared to CAD 38.9 million in the previous corresponding period. An increase of CAD 3.7 million in ACFO was primarily due to lower capital expenditures and higher interest expense savings.

• Consistent dividend distribution: The Company has an excellent track record of dividend distribution reflecting resilience and healthy cash flow generation. Recently, it declared a cash distribution of CAD 0.036 per share for the month of June, representing approximately CAD 0.432 per REIT unit on an annualized basis.

Source: Kalkine Analysis 

Financial overview of Q1 2021

Source: Company 

• In Q1 2021, the company reported its NOI at CAD 100.9 million, against CAD 103.1 million in the previous corresponding period. The decline in NOI was primarily due to lower property rental revenue, which stood at CAD 171.9 million V/s CAD 176.1 million. 
• Income (loss) before income taxes increased drastically to CAD 38.6 million in the reported period, against a negative EBIT of CAD 52.3 million in pcp. This massive rise in EBIT was primarily due to a lower operating expense on account of minimized decrease in value of investment properties.
• Net income stood at CAD 37.6 million, against a loss of CAD 50.8 million in the previous corresponding period. The reasons discussed above were behind the rise in net income.
  

Risks associated with investment

The Company's revenue and operating results depend significantly on the occupancy levels and rent collection. Hence, fluctuations in occupancy levels and business volumes or delay in rent collection would affect the group’s performance. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

Despite the ongoing and considerable challenges, the trust’s urban portfolio has remained robust, as shown by strong leasing activity, increases in the average net rental rate, and consistent cash collections. The REIT also reported a CAD 42.6 million rise in adjusted cash from operations in Q1 2021, compared to CAD 38.9 million in pcp. Furthermore, the company is continuously focusing on maintaining a strong balance sheet and optimizing its liquidity position. They also made a temporary reduction of its monthly distribution. The reduction would provide an additional retained cash flow of approximately CAD95 million. Based on the rationales discussed above and valuation, we recommend a “Buy” rating on the stock at the closing price of CAD 17.67 on June 29, 2021. We have considered RioCan REIT, Allied Properties REIT, Killam Apartment REIT, etc. as the peer group for the comparison.

One-Year Technical Price Chart (as on June 29, 2021). Analysis by Kalkine Group 

Parex Resources Inc.

Parex Resources Inc (TSX: PXT) engages in the exploration, development, and production of crude oil. The company brings technology utilized in the Western Canada Sedimentary Basin to South American basins with large oil-in-place potential.

Key Highlights:

• FY21 Guidance depicts a sign of revival: The group expects its FY21 production to remain within the range of 47,000-49,000 boe/day, higher than 46,518 boe/day in FY20. A higher production guidance indicates a demand recovery. On the other hand, total capital expenditure is expected in between USD 250 million to USD 270 million, which includes maintenance, development/appraisal and exploration/new growth programs.

Source: Company Report

• Reported higher operating netback: In Q1FY21, the group reported a surge in the operating netback within the crude oil segment on a y-o-y and q-o-q basis, respectively, which is encouraging. Operating netback is calculated by adjusted production and transportation costs (direct expenses) from the oil and gas revenue. A growing netback is a healthy sign for the company. In Q1FY21, operating netback stood at USD 37.38/Boe, higher than USD 24.41/Boe in Q1FY21 and USD 24.76/Boe in Q4FY20, respectively. The growth was primarily aided by higher crude oil prices coupled with a slide in transportation expense.
  

• Zero-debt balance sheet and Stable Fund flow from operation: Despite being a capital-intensive business, the group is a debt-free entity and hence has improved financial flexibility. Notably, PXT has a stable fund flow generation, which helps the company to support its capital expenditure. Going forward, the group expects its annual capital expenditures to be supported by its funds flow, and hence, there is a lower possibility of any borrowings. Notably, free fund flow stood at USD 85.377 million in Q1FY21, significantly higher than USD 26.047 million in Q1FY20.

Q1FY21 Financial Highlights:

• PXT announced its quarterly result, wherein the company posted revenue of USD 196.487 million, stood higher from USD 171.401 million in the previous corresponding period (pcp). The increase was driven by strong momentum from the Crude oil segment due to a higher realized price of USD 52.80/boe, higher than USD 38.47/boe in pcp.
• Total expenses were recorded higher at USD 85.613 million, increased from USD 77.124 million in Q1FY20. The increase was primarily due to an addition of Cash settled share-based compensation expense amounting to USD 9.504 million. However, the quarter was marked by lower transportation costs, decline in General and administrative expense combined with lower production expenses.
• The group turned profitable and reported a net income of USD 47.460 million, as compared to a net loss of USD 3.779 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The revenue of the company is co-related with the crude oil prices, and price volatility is likely to affect the financial performance.

Valuation Methodology (Illustrative): Price to Earnings based 

Stock Recommendation:  

Despite persisting volatility in the crude oil prices, the company has delivered a positive net income and recorded industry leading operating netbacks, which is worth mentioning. Funds from operation stood higher at USD 124.97 million in Q1FY21 compared to USD 97.313 million in pcp. In Q1FY21, the company reported drilling activities of nine wells, as compared to eight wells drilled in the previous quarter. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered industry (Oil & Gas) mean on an NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 21.28 on June 29, 2021.

One-Year Technical Price Chart (as on June 29, 2021). Analysis by Kalkine Group

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 highlights

• Deepens its strategic alliance with Wipak: The company is closely aligned with Wipak (European sister Company), one of Europe's leading manufacturers of packaging materials. We believe that the strategic collaboration with Wipak would give the Company with access to the experience of packaging specialists all over the world, as well as a wide selection of goods and packaging solutions. In the future, this partnership would be strengthened, and the firm would expand its position in the healthcare packaging industry.

• Debt-free balance sheet with strong financial flexibility: At the end of Q1 2021, the company has a strong balance sheet, which is virtually debt-free along with cash and cash equivalents balance of USD 496.2 million. Moreover, despite a sluggish economic scenario, the group reported consistent net cash flow from operations at USD 45.4 million in Q1 2021, against USD 42.5 million in previous corresponding period.

• Industry beating margins: Despite the hard time, the management’s solid determination and cost saving strategies helped them leaping the industry median margins on many fronts in Q1 2021, which is a key positive as the higher margins indicate operational efficiency.

• Announced special dividend: Recently, the Company's Board declared a special one-time dividend of CAD 3.0 per share along a normal dividend of CAD 0.03 payable on July 9, 2021, to shareholders of record at the close of business on July 02, 2021.

Financial overview of Q1 2021 (In thousands of US dollars)

Source: Company

• In Q1 2021, the revenue posted by the company increased 5.2% to USD 224.8 million compared to USD 213.5 million, while volumes grew by 6.6%.
• The group posted a gross profit of USD 65.8 million, compared to USD 64.1 million in the previous corresponding period (pcp). The marginal increase was due to a rise in revenue. The gross profit margins fell to 29.3% V/s 30% in pcp, on account of higher cost of sales.

• Income from operations stood at USD 34.2 million, against USD 31.1 million in the pcp, partially offset by higher sales and marketing expense.
• The company reported a net income of USD 25.2 million in Q1 2021, compared to USD 23.5 million in pcp.
  

Risks associated with investment

The company derives a significant part of the revenue from the food-service segment, and any further restriction would result in a slide in the overall volumes and financials. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The company is an essential supplier of packaging materials and machinery within the food, beverage, and healthcare segments. New customer business volume gains from initial product launches within the rigid container product group, in addition to reclose label packaging, spouted pouch and frozen food wins from the flexible packaging segment, would provide a solid foundation for volume expansion in 2021. Moreover, the packaging machinery segment has a healthy level of orders which would keep the operations active for the rest of the year. Furthermore, for 2021 the company is committed to securing organic growth opportunities with new technologies, processes, and material sciences, which is a key positive statement. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock at the closing price of CAD 41.86 on June 29, 2021. We have considered CCL Industries Inc, Aptargroup Inc, Richards Packaging, etc. as the peer group for the comparison.

One-Year Technical Price Chart (as on June 29, 2021). Analysis by Kalkine Group 

Lassonde Industries Inc

Lassonde Industries Inc (TSX: LAS.A) is engaged in the development, manufacturing, and marketing of ready-to-drink fruit and vegetable juices and drinks. It also acts as a producer of store brand shelf-stable fruit juices and drinks in the United States and a major producer of cranberry sauces.

Key highlights 

• Stable revenue: The Company's sales in Q1 2021 was CAD 466.8 million, down CAD 5.6 million or 1.2% against CAD 472.4 million in the previous corresponding period. However, sales were up CAD 10.4 million or 2.2% on a year-over-year basis, excluding a CAD 16.0 million negative foreign currency effect. The growth in sales of private label items, as well as a beneficial shift in the sales mix of national brands, contributed to this optimism. It's crucial to recall that sales in March 2020, benefited from an exceptional rise in volume as a result of the pandemic-related building of food stockpiles.

• Improvement in working capital ratio: The business's working capital ratio increased to 1.63:1 in Q1 2021, compared to 1.52:1 on December 31, 2020, thanks to the cautious actions implemented by management in the recent past. Current assets rose to CAD 452.5 million from CAD 440.6 million, while current liabilities fell 4.3% to CAD 277.8 million.

• Adding Capacity: With a total investment of over CAD 30.0 million, the company is trying to increase the production capacity of its low-acidity products. Furthermore, the management expects that an additional capacity would increase sales by 25% to 30% upon completing the project, which would be a key positive.
  

• Consistent dividend distribution: The Company has an excellent track record of dividend distribution reflecting resilience and healthy cash flow generation. Recently, it paid a quarterly dividend of CAD 0.88 per share, payable on June 15, 2021.

Source: Kalkine Analysis 

Financial overview of Q1 2021 (In thousands of Canadian dollars)

Source: Company 

• In Q1 2021, the sales reported by the company stood at CAD 466.8 million compared to CAD 4 million in the previous corresponding period. Once we adjust the negative foreign currency effect, the sales reflect a positive change by 2.2% on a year-over-year basis.

• Operating profit stood at CAD 31.4 million in Q1 2021 compared to CAD 30.3 million in pcp. This increase came from an increased profitability from the Canadian operations, mainly due to a higher gross margin.
• The Company posted a net profit of CAD 20.4 million, against CAD 23.7 million in the previous corresponding period, partially offset by higher income tax expense at CAD 7.3 million V/s CAD 4.7 million in pcp.

Risks associated with investment

The company is exposed to a variety of risks, including the economic, industrial, competitive and regulatory environment, its ability to attract and retain customers, changing consumer preferences, the availability and cost of raw materials and transportation, etc. 

Valuation Methodology (Illustrative): Price to Earnings 

Stock recommendation

The group delivered a decent quarterly result, where operating profit increased by CAD 1.1 million to CAD 31.4 million in the reporting period, up from CAD 30.3 million. The firm was able to increase its working capital ratio from 1.52:1 to 1.63:1. The Company thinks it would be able to progressively modify its sales prices in the second and third quarters to mitigate inflationary pressures. Furthermore, it would be increasing its storage capacity at one of its Canadian plants and the production capacity for single-serve fruit juices and drinks in the United States, and the management expects that the additional capacity would increase sales by 25% to 30% upon completing the project. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 175.59 on June 29, 2021. We have considered Rogers Sugar Inc, Hostess Brands Inc, B&G Foods Inc., etc as the peer group for the comparison.

One-Year Technical Price Chart (as on June 29, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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.