Enbridge Inc.

Enbridge Inc. (TSX: ENB) is an energy generation, distribution, and transportation company in the U.S. and Canada.

Key Highlights:

• Favorable Macros: The oil and natural gas market went for a toss in 2020 due to a rising demand supply mismatch on account of falling crude oil demand driven by restriction imposed across industrial and manufacturing activities. However, during the second half of 2020, the scenario of the oil and gas market improved, supported by steady vaccination rate and steady rise in demand from industrial segments. Global GDP growth is expected ~5.5% in FY21, while demand for crude oil refining products and natural gas is expected to remain stable, which is further  likely to benefit players like ENB who operates in the same domain.                           

• An income play: The company has a solid history of consistent dividend payment, backed by resilient performance from liquid pipelines, gas transmission and gas distribution storage operations. Moreover, the company has a wide distribution network across the North American market and is enhancing its presence across the other markets outside North America, which helps in generating stable cashflow. Moreover, the stock carries an impressive dividend yield of ~7.2%, which is lucrative considering the current interest rate scenario.

Ten-year dividend distribution (Source: REFINITIV)

Q1FY21 Financial Highlights:

• ENB announces its quarterly result, wherein the company posted total operating revenues of CAD 12,187 million, higher than CAD 12,013 million in the previous corresponding period (pcp). The increase was driven by strong growth from transportation and other services (CAD 4,218 million, v/s CAD 3,208 million in pcp), while a lower commodity sale (CAD 6,429 million v/s CAD 7,389 million in pcp) remained a drag.
• Total operating expenses stood lower at CAD 9,639 million, as compared to CAD 10,500 million in the previous corresponding period (pcp). The decline was primarily supported by lower commodity costs (CAD 6,198 million v/s CAD 7,163 million in pcp), coupled with slightly lower operating and administrative costs (CAD 1,559 million v/s CAD 1,600 million in pcp).
• The group reported net earnings of CAD 2,014 million, as compared to a net loss of CAD 1,364 million in the previous corresponding period (pcp).

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The group’s operations are dependent on the demand of oil & gas. Any change in demand dynamics of the commodity would affect the group’s performance.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation: The company has a diversified revenue base, and the group is ready to take the next leap related to energy transmission. The company has made investments H2, RNG, & CNG segments related to low-carbon opportunities. Moreover, the corporation is also foraying into renewable segment, wherein it sees ample growth across offshore wind segment and across solar related projects. We have valued the stock using the price to P/Earnings based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered peers like Inter Pipeline Ltd, Emera Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 46.47 on May 28, 2021.

One-Year Price Chart (as on May 28, 2021). Analysis by Kalkine Group

Barrick Gold

Barrick Gold (TSX: ABX) is one of the world's largest gold producers, which has mines across North America, South America, Australia, and Africa.

Key Highlights:

• Impressive portfolio and Strong Presence: The company is a leading gold miner and has a strong presence across the Globe. The group holds five among the ten biggest gold mines in the world. The company holds tier one gold reserves.

Source: Company Presentation

• Robust Financial Performance: The company has reported a constant increase of cumulative operating cash flows, cumulative free cash flows and has subsequently reduced the net debt during the last nine quarters. This is a glaring example of strong operating efficiency and prudent capital management.

Source: Company Report

• Growth in dividend payment: The stock of ABX is very much investor friendly, as it has constantly increased its dividend distribution in the last nine quarters.

Source: Company Presentation

• Prudent Capital Expenditure management: Due to the nature of the operations, capital expenditure plays a pivotal role for the mining companies. The company has used its capital prudently and has maintained the overall capital investment expenditure within USD 400 million to USD 450 million in the recent past, which is commendable as there is no sign of an abrupt rise in capital expenditure.                                  

Source: Company Report

Q1FY21 Financial Highlights:

• ABX announces its quarterly result, wherein the company posted revenue of USD 2,956 million, higher than USD 2,721 million in the previous corresponding period (pcp). The improvement was majorly driven by higher Realized gold price (USD 1,777/oz to USD 1,589/oz in pcp), partially offset by lower gold production (1,101 koz, down 12% y-o-y).
• Cost of sales slumped to USD 1,712 million from USD 1,776 million in pcp. Moreover, General and administrative expenses and exploration, evaluation and project expenses stood lower than the previous corresponding period.
• Adjusted EBITDA stood at USD 1,800 million, surged 23% on y-o-y basis.
• Net income stood soared USD 830 million, as compared to USD 663 million in the previous corresponding period, supported by lower costs metrics coupled with a fall in net finance costs.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Price volatility in international gold prices would affect the realization price and subsequently affect the income and cash flow of the company.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation

For FY21, the company expects gold production of 4.40 - 4.70 million ounces, while copper production is expected at 410 – 460 million pounds. Cost of sales for gold and copper is expected at USD 1,020 - 1,070/ oz and USD 1.90 - 2.10/lb, respectively. Total cash costs for FY21 are expected between USD 680 - 730 /oz for gold, while C1 cash costs for copper is expected within the range of USD 1.40 - 1.60/ lb. The company expects its capital expenditure within the range of USD 1,800 - 2,100 million. We have valued the stock using the price to 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 Agnico Eagle Mines Ltd, Newmont Corporation etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 29.11 on May 28, 2021.

One-Year Technical Price Chart (as on May 28, 2021). Analysis by Kalkine Group

Suncor Energy Inc.

Suncor Energy Inc. (TSX: SU) is one of Canada's largest integrated energy companies, which operates in western Canada, east coast Canada, the United States, and the North Sea. The upstream portfolio includes bitumen, synthetic crude, and conventional crude, which helps to offset higher-cost oil sands production.

Key Highlights:

• Growing investment in Technology: The company has invested handsomely in technology, which is expected to help the company in Mining & extraction and would lead to lower emissions and would help in achieving low carbon fuels. This is expected to enhance the company’s operational performance. Notably, the group has invested CAD 2.7B in technology advancement since 2015, while it has allocated ~7% of its total capital for technology in 2020.                            

Source: Company Presentation

• Impressive Guidance: Despite the ongoing sluggish economic scenario, the company expects its FY21 production to remain within the range of 740– 780 kboe/day. The company expects its refinery utilization in between 90% to 96%, which looks promising.
• Ample Liquidity and prudent capital management: The company maintains a decent liquidity profile and reported cash and cash balances of CAD 1.762 billion in Q1FY21. Moreover, the company has available credit facilities of CAD 4.432 billion. The current liquidity level seems to be sufficient to fund the company’s long-term and short-term requirements. The group has a manageable debt profile, which would help the company to retain its liquidity levels. Additionally, during Q1FY21, the company made CAD 1.1 billion of debt reduction.                                       

Source: Company Presentation

Q1FY21 Financial Highlights:

• SU announces its quarterly result, wherein the company posted revenues and other income of CAD 8,636 million, higher than CAD 7,756 million in the previous corresponding period (pcp). The improvement was primarily supported by higher income from Oil Sands and Refining & Marketing segments.
• The quarter was marked by a decline in purchases of crude oil and products (CAD 2,583 million v/s CAD 3,180 million in pcp), a significant decline in depreciation, depletion, amortization and impairment expense (CAD 1,490 million v/s CAD 4,146 million in pcp), and slightly lower operating, selling and general costs (CAD 2,900 million v/s CAD 2,936 million in pcp).
• The company posted Net Earnings of CAD 821 million, as compared to a net loss of CAD 3,525 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Volatility in crude oil prices would affect the business performance of the group. Moreover, demand-supply mismatches are likely to affect the sales volumes of the company.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company is emphasizing on several cost savings initiatives till FY23, which is expected to generate free funds flow of CAD 1 billion. Strong supply chain management, Suncor/Syncrude Interconnecting Pipelines, and Business Process Transformation under digital process transformation etc, would improve the group’s performance. Moreover, the demand for crude oil is likely to improve in FY21 following eh rollout of vaccine across the globe. We have valued the stock using the Price to 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 Imperial Oil Ltd, Pembina Pipeline Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 27.90 on May 28, 2021.

One-Year Technical Price Chart (as on May 28, 2021). Analysis by Kalkine Group

Wheaton Precious Metals Corp

Wheaton Precious Metals Corp (TSX: WPM) is a precious metal streaming company. The company has entered into over 20 long-term purchase agreements with 17 different mining companies, for the purchase of precious metals and cobalt.

Key highlights 

• Generated record revenue in Q1 2021: In the first quarter of 2021, the company generated record revenue of USD 324 million, which included USD 135 million in gold sales, USD 174 million in silver sales, USD 12 million in palladium sales, and USD 3 million in cobalt sales.
• Increasing free cash flows: On the back of agile management, record revenues and higher average realization price of metal In Q1 2021, the company generated an operating cash flow of USD 232.1 million, which increased 30.7% from USD 177.5 million relative to the previous corresponding period.

• Became debt free: The Company fully repaid USD 195 million under the Revolving Facility in Q1 2021 and became debt-free. We believe this would improve the Company's margin profile, which is a major plus.

• Future guidance on production: In 2021, the company expected to produce 370,000 to 400,000 ounces of gold, 22.5 to 24.0 million ounces of silver, and 40,000 to 45,000 gold equivalent ounces (“GEOs”) of other metals, for a total of 720,000 to 780,000 GEOs. It estimates that average production would be 810,000 GEOs over the five years ending in 2025, while for the ten years ending in 2030, its average annual production will amount to 830,000 GEOs.

• Increasing quarterly dividend: Recently the company declared its second quarterly cash dividend payment for 2021 of USD 0.14 per common share, an increase of 40% relative to the previous corresponding period. An increase in dividend distribution represented the third quarterly dividend increase in a row, which is praiseworthy. 

Date Source: Company 

• Industry beating margins: The resilient business and management’s solid determination along prudent steps helped in leaping the industry median margins on many fronts in Q1 2021, which is a key positive. The chart below gives a glimpse of this.

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the company reported higher revenue at USD 324.1 million against USD 254.7 million in the previous corresponding period. Increased revenue was mainly due to a 27% increase in the average realized gold equivalent price.
• The gross margin stood at USD 175.1 million, against USD 123.0 million in Q1 2020. The company witnessed a drop in its total cost of sales at 45.9% V/s 51.7% in pcp, which helped grow gross profit.
• The company’s net income in the reported period stood at USD 162.0 million, against USD 94.8 million in pcp. The rise in net income was mainly due to higher gross profit, lower expenses, lower finance cost and income tax recovery. 

Risks associated with investment 

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

Valuation Methodology (Illustrative): EV to Sales

*Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock recommendation

With record revenue and over USD 230 million in operating cash flow, the company's diversified, high-quality portfolio demonstrated its strength and growth profile in the first quarter. As a result of this strong performance, the company has raised its dividend for the third consecutive quarter and now has net cash on the balance sheet, which is commendable. Furthermore, the company added a new precious metals stream on a top-tier copper development project, Santo Domingo, which should provide additional growth. Additionally, it leaps the industry median margins on many fronts in Q1 2021, which is a key positive. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stocks at the closing price of CAD 57.95 as on May 28, 2021. We have considered Franco-Nevada Corp, Agnico Eagle Mines Ltd. as the peer group for the comparison.

1-Year Technical Price Chart (as on May 28, 2021). Analysis by Kalkine Group

Open Text Corporation

Open Text Corporation (TSX: OTEX) enables organizations to gain insight through market-leading information management solutions powered by OpenText Cloud Editions.

Key Highlights:

• Balanced Portfolio: The company caters to all the leading industries, which provides a balanced portfolio and hence, it is not dependent on a particular industry which lowers the risk of dependence on a specific sector. Almost two-thirds of the revenue is being derived from the Americas, while the company is focusing on enhancing its presence across the EMEA region and other major regions. In terms of revenue mix, OTEX derives more than 80% of its revenue from Cloud Services & Subscriptions and Customer Support segment, while License and Professional Service & Other contributes higher single-digit percentage, respectively.

Data Source: Company

• Increasing presence across the Asia Pacific region: The company is enhancing its presence across the Asia Pacific, as the region offers solid potential. Recently, the group reported that ATCO Australia opted for information management solutions to the OpenText™ Cloud to modernize work for improved flexibility and cost savings. The product offers higher productivity, process stability, and providing solutions to guide with the regulatory compliance. Innovative and customized offerings are expected to remain as a key selling point of the company’s product.

• Improved Financial Flexibility: The company reported a constant decline in capital expenditure in terms of revenue, which is a glaring example of financial flexibility and is a healthy sign. Moreover, the company do not have any immediate debt maturity till FY25, which ensures abrupt liquidity levels.       

Source: Company Presentation

Q3FY21 Financial Highlights:

• OTEX announced its quarterly result, wherein the company posted total revenues of USD 832.931 million, as compared to USD 814.679 million in the previous corresponding period (pcp). The increase was driven by higher revenue from the Cloud services and subscriptions segment coupled with a growth from the Customer support segment, partially offset by lower income from the License segment and Professional service & other segments, respectively.
• Gross profit increased to USD 571.665 million v/s USD 532.492 million in Q3FY20, thanks to the higher income coupled with a lower cost of revenues (USD 261.266 million v/s USD 282.187 million in pcp).
• The quarter was marked by higher Research and development costs (USD 110.071 million v/s USD 108.184 million in pcp) and a lower in sales and marketing expense (USD 158.687 million v/s USD 166.234 million in pcp). Income from operations soared to USD 152.396 million, from USD 95.077 million in pcp.
• Adjusted EBITDA grew 14.5% on y-o-y basis to USD 297.1 million.
• The corporation reported a net income of USD 91.528 million, as compared to a net income of USD 26 million in pcp. The increase was driven by higher income from operations coupled with a decline in net interest and other related expense.

Q3FY21 Financial Highlights (Source: Company Report)

Risks: The company’s product requires constant upgradation in order to stay ahead of the competition. Hence, the arrival of new players would likely to result in price competition and loss of market share.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

Over the years, the group reported a constant decline in its net leverage ratio, backed by solid cash flows. Notably, the net debt leverage ratio declined from 2.8x in Q2FY20 to 1.57x in Q3FY21, which is worth mentioning.                   

Source: Company Presentation

Moreover, the majority of the company’s revenues are repetitive businesses, which also provides stable revenue generation amidst any economic cycle. We have valued the stock using the Price to 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 j2 Global Inc, Box Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of OTEX at the last closing price of CAD 56.75 on May 28, 2021.

One-Year Technical Price Chart (as on May 28, 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.