Aritzia Inc.

Aritzia Inc. (TSX: ATZ) is an integrated design house of exclusive fashion brands that designs apparel and accessories for its collection of exclusive brands and sells them under the Aritzia banner. 

Key highlights:

• Strong Revenue Growth: The company has delivered an impressive top-line performance during FY08 to FY20 and reported ~16.7% CAGR growth, which looks decent. Revenue grew from CAD 153 million in FY08 to CAD 981 million in FY20, driven by a consistent expansion within its distinct market. The group expects its future top-line growth through improved traction from eCommerce and omni-channel capabilities, expansion through boutique network coupled with higher brand awareness and product-innovation.

Revenue Trend (Source: Company Reports)

• Healthy Cash-flow to drive higher Financial Flexibility: The company has a solid liquidity position aided by CAD 100 million of revolving credit facility, CAD 207 million of cash and cash equivalent at the end of Q2FY21. On an LTM basis, the company generated an impressive free cash flow of CAD 94 million.

Q2FY21 Financial Snapshot (Source: Company Presentations)

Q2FY21 Financial Highlights:

• Net revenue stood at CAD 200.2 million, reflecting a fall of 17% on y-o-y basis. The decline was primarily attributed to extended store closures on account of COVID 19 restrictions. The company operated with ~31% of the stores during the quarter, and in the later half, the company ended with ~96% operational stores.
• Gross profit margin declined to 35.2% from 39.6% in Q2FY20, primarily due to occupancy, warehousing and distribution centre cost deleverage from the reduced retail revenue, partially offset by rent abatements and government payroll subsidies received during the period.
• The business reported a solid growth from eCommerce segment with 82.3% y-o-y revenue growth.
• Adjusted EBITDA stood at CAD 12.3 million, significantly lower from CAD 36.4 million in Q2FY20, primarily due to the loss of net revenue from the impacts of COVID-19. 
• The company reported a net loss of CAD 0.9 million, as compared to the net income of CAD 17.9 million in Q2FY20.

Q2FY21 Income Statement Highlights (Source: Company Reports)

Risks: Continuation of store closures due to extended restrictions from state and provincial governments would hamper the overall performance of the company.

Valuation Methodology (Illustrative): EV to Sales

All forecasted figures and peers have been taken from Thomson Reuters 

Stock Recommendations: The business is a vertically integrated, innovative design house and in-store and online fashion boutique company, which caters to the premium women apparel segment. With the gradual recovery of the economy along with increasing consumer spending, we believe the company is well poised to drive future sales growth. Furthermore, the company witnessed encouraging response for its new fall/winter product launch, which has led to improved traction within the eCommerce business and boutique productivity during the first six weeks of Q3FY21. We have valued the stock using EV to Sales based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered Gildan Activewear Inc, Canada Goose Holdings Inc etc., as a peer group. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 20.07 on October 29, 2020.

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

Cogeco Communications Inc 

Cogeco Communications Inc. (TSX: CCA) is a Canada-based cable operator who provides the internet, video, and telephony services with broadband fibre networks to residential and business customers. Cogeco Connexion carries out its Canadian broadband services activities in the provinces of Quebec and Ontario and the American broadband services activities are carried out by Atlantic Broadband in approximately 11 states.

Key Highlights

The company highlighted on financial guidelines for fiscal 2021; under this, they expect

• low-single-digit % growth in revenue, adjusted EBITDA and free cash flow for fiscal 2021.
• Capital intensity is expected to be at around 20%.

The following table outlines the fiscal 2021 financial guidelines on a consolidated basis:

Source: Company

• Increase in the revenue should be seen as a result of growth in the American broadband services segment for both the residential and business sectors, the continued expansion in Florida, as well as the positive full-year effect is expected from the acquisition of Thames Valley Communications which was completed in March 2020.

• Increased dividend: The company has increased its dividend at a time when most of the companies are suspending their dividends. This shows the financial strength of the company. CCA declared a quarterly eligible dividend of CAD 0.64 per share compared to CAD 0.58 in the same quarter of fiscal 2019. It is an essential factor for regular income-seeking investors with a long-term horizon.

• Rise in Free cash flow: In 4Q 2020, free cash flow increased by 32.2% to CAD 111.4 million. Higher adjusted EBITDA and decrease in the acquisition of property, plant and equipment helped the company to achieve this increase in free cash flow. 

Financial overview of Fourth Quarter of Fiscal 2020

Source: Company

• The company showcased an increase in revenue by 3.7% to CAD 605.1 million from CAD 583.6 million compared to the same period on a Y-o-Y basis.

• Adjusted EBITDA registered a growth of 6.9% to reach CAD 294.5 million in Q4 2020, from CAD 275.6 million compared to the same period on a Y-o-Y basis.

• Profit for the period amounted to CAD 96.1 million in Q4 2020, as against CAD 92.4 million on Y-o-Y basis. 

Segmental Bifurcation of revenue in 4Q 2020

Source: Company

Acquisition of Derytelecom is in process

Recently the company completed due diligence process to acquire DERYtelecom, the third-largest cable provider in the province of Québec, at a price of CAD 405 million. Post the acquisition, the company will increase its presence in areas that are adjacent to Québec. This transaction is expected to close by the end of the second quarter of the fiscal year 2021.

Risks associated with investment

The company gets affected by adverse economic conditions leading to a declining level of retail and commercial activity; this could hurt the demand for their products and services. Other risks such as currency fluctuations, technology risks, regulatory risks are also present. 

Valuation Methodology (Illustrative): Price to Earnings

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Despite the many challenges of the crisis, which still has the world in its grip, the company was able to maintain its financial discipline. Demand for high-speed Internet product was sustained both in Canada and in the United States. The company announced the expansion of the network in several regions across its Canadian market and started offering a new IPTV platform. Robust financial performance in 4Q 2020, along with the expectation low-single-digit % growth in revenue, adjusted EBITDA, and free cash flow for fiscal 2021 gives confidence in the group. Therefore, based on the above rationale and valuation, we have given a “BUY” rating at the closing price of CAD 94.23 on 29 October 2020. We have considered Quebecor Inc, Shaw Communications Inc, Rogers Communications Inc etc. as the peer group for the comparison.

CCA daily technical chart. Source: Refinitiv (Thomson Reuters)

Canadian Western Bank

Canadian Western Bank (TSX: CWB) is a diversified financial services company and is known for a highly proactive client experience serving both retail and corporates across Canada. The key business lines include full-service business and personal banking offered through branch locations of Canadian Western Bank and Internet banking services provided by Motive Financial. 

Key Highlights

• Balanced Loan-portfolio: The Bank reported a strong loan growth over the years by focusing on full-service relationships with strategically shifting industry mix. The company has a balanced portfolio and has shifted its concentration from real estate project to general commercial loans, and equipment financing and leasing, which augurs well for risk-diversification. Furthermore, the company has a minimum exposure across oil and gas production and oil field services of <1% and <2%, respectively, which is impressive looking at the current economic scenario.             

Loan Portfolio Trend (Source: Company Reports)

• Resilient Business model, decline in Provision for Credit losses: Since the company has lower exposure to the troubled sector, it has the luxury to reduce provisioning. Provision for credit losses on total loans in terms of average loans, during Q3FY20 stood at 33 basis points, declined from 49 basis points during Q2FY20. Provision for credit losses on impaired loans remained unchanged at 0.22%.
• An Income Play: The group has a track record of dividend distribution. At the last traded price, the stock was offering a dividend yield of 4.8%, which is lucrative amid low interest rate environment.

Provision for Credit Losses on Total Loans (Source: Company Presentation)

Business Highlights:

• The company would disclose its fourth quarter FY20 results on December 04, 2020.
• The company seek to issue CAD 175 million of 6.00% Limited Recourse Capital Notes Series 1 (Non-Viability Contingent Capital). The funds would be utilized for general banking purposes.
• Recently, the Bank has inaugurated its newest full-service banking center, and first physical location in Ontario. With the new establishment, CWB would continue execution of its growth and diversification strategy. The business has a strong presence across Ontario, and in order to convert primary lending relationships into full-time relationships, the particular center has been formed.

Q3FY20 Financial Highlights:

• Q3FY20 revenue stood at CAD 226.484 million, reflecting a growth of 4% on y-o-y basis. The increase was supported by a ~37% y-o-y growth in non-interest income (CAD 25.711 million) while Net interest income stood at par with the previous corresponding period (pcp).
• Common shareholders’ net income declined 12% on y-o-y basis to CAD 62.252 million, partially due to a 7% increase in the non-interest expense and a higher provision for credit losses from Q3FY19. However, the provision from credit losses improved to CAD 24.362 million, from CAD 34.901 million in Q2FY20.
• Common equity Tier 1 ratio declined marginally to 8.8% from 9.1% in Q2FY20.             

Q3FY20 Financial Highlights (Source: Company Reports)

Risks: The company might face an increase in non-performing assets owing to the sluggish economic environment. Further, any volatility in interest rate would affect the group’s performance.

Valuation Methodology: Price to Book Based (Illustrative)

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

Stock Recommendation: The company has strong capital ratios, with buffers above the minimum regulatory requirement. The Company is focusing on enhancing the banking presence through its digital platforms, and it is investing in digital infrastructure. The Company intends to increase its differentiated full-service client experience and will seek for the accelerated growth as the economy stabilizes. The Company reported a stable set of numbers, which indicates the resiliency of the business. We have valued the stock using Price to Book value-based relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered Laurentian Bank of Canada, Banko of Montreal etc., as a peer group. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 24.45 on October 29, 2020.

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

First National Financial Corporation

First National Financial Corporation (TSX: FN) is a Canada-based parent company of First National Financial LP (FNFLP), which is an originator, underwriter, and servicer of prime residential (single-family and multi-unit) and commercial mortgages.

Key Highlights

• Increased Dividend and declared special Dividend: The Company announced an increase to the regular monthly Dividend and announced special Dividend. Effective with the payment on December 15, 2020, the Dividend will increase to CAD 2.10 per share on an annualized basis from its current annualized rate of CAD 1.95 per share. Additionally, a special dividend amounting CAD 0.50 per share will also be paid on December 15, 2020, to shareholders of record on November 30, 2020.

• Rise in placement fees: In Q3 2020, the Company's placement fees increased 41% to CAD 98.4 million from CAD 69.8 million on Y-o-Y basis, reflecting higher mortgage volume with institutional investors.

• Rise in mortgage serving income: In Q3 2020 this financial institution's mortgage servicing income increased 5% to CAD 46.0 million from CAD 43.9 million on Y-o-Y basis, due to growth in revenues earned on the Company's underwriting and fulfilment processing services business. 

Financial Overview of Q3 2020 (in thousands of Canadian dollars)

Source: Company

• In Q3 2020, the company’s revenue increased 3% to CAD 373.8 million from CAD 362.8 million in Q3 2019.

• The company saw an increased in Pre-FMV Income by 25% to CAD 99.6 million from CAD 79.8 million in Q3 2019.

• Mortgages under administration were increased by 6% to a record level of CAD 117.1 billion as compared to CAD 110.6 billion on September 30, 2019 and increased 8% annualized during the quarter.

• The company reported net income of CAD 72.5 million, which translated into an EPS of CAD 1.20 as compared to net income of CAD 60.6 million with an EPS of CAD 1.00 on Y-o-Y basis.               

Risks associated with investment

The group might see a delay in loan repayment from consumers on account of a fall in consumer’s income, which would hamper the financial performance. COVID-19 pandemic could lead to financial losses in the company's portfolio and a decrease in their net income and book value.

Valuation Methodology (Illustrative): Price to Earnings

All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation

The management is optimistic about the fourth quarter and the start of 2021. Expectations for the upcoming quarter are based on substantially higher seasonal residential origination and Commercial segment success in growing origination at higher spreads. The Company is confident that its strong relationships with mortgage brokers and diverse funding sources would continue to set them apart from its competition. We believe that the Company will continue to generate income and cash flow from its CAD 34 billion portfolio of mortgages pledged under securitization and CAD 81 billion servicing portfolio. Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 37.85 on 29 October 2020. We have considered Element Fleet Management Corp, Morneau Shepell Inc, TMX Group Ltd etc. as the peer group for the comparison.

FN daily technical chart. Source: Refinitiv (Thomson Reuters)

Maple Leaf Foods Inc

Maple Leaf Foods Inc (TSX: MFI) is a Canadian consumer-packaged meats company that produces prepared meats and meals, fresh pork, and poultry and turkey products. The company sell their products to the markets of Canada, the United States, Mexico, and Japan.

Key Highlights

• Improvement in Meat Protein Segment Adjusted EBITDA Margin: In Q3 2020, the company’s Meat Protein Group Adjusted EBITDA Margin stood at 12.1%, achieving a fourth consecutive quarter of above 11.0% despite COVID-19 impacts, including the operational impact on the Company’s Brandon, Manitoba facility due to community outbreak.

• Focus on expansion:The company has estimated that its total capital expenditures for the year will be between CAD 450 million to CAD 500 million, and construction Capital will comprise around 70% of this spend. This massive portion of the Construction Capital will be related to the London and Ontario poultry facility, as well as other projects to enhance the capacity.

• Increase in Free cash flows: During the quarter under consideration, the company generated CAD 135.2 million of cash from operating activities as against CAD 97.7 million reported a year-over period. The improvement was primarily due to higher earnings, and an increase in free cash flows by CAD 22 million to CAD 60 million in Q3 2020 on a YoY basis. 

• A Consistent Dividend Payer:On October 26, 2020, the company approved a quarterly dividend of CAD 0.16 per share and CAD 0.64 per share on an annual basis. Annual dividend recorded a growth of 10.3% as compared to CAD 0.58 on Y-o-Y basis. 

Financial overview of Q3 2020

Source: Company

• The company posted a robust set of numbers in Q3 2020. Sales in this period were CAD1,057.2 million compared to CAD 995.8 million last year, reflecting an increase of 6.2%, mainly driven by Meat Protein Group.
• The growth in Meat Protein Group was primarily due to increased demand in the retail channel in North America. Sales were also benefited from strong growth in sustainable meats, exports to Asian markets and the positive impact of foreign currency translation.
• Gross profits posted by the company increased by CAD 88.4 million to CAD 228 million against CAD 139.7 million in the previous corresponding period. The growth was driven by a lower cost of goods sold along with higher revenue. The company managed to bring down its cost of goods sold by almost 3 % to CAD 829 million.
• Net earnings posted by the company in this period were CAD 66.0 million, compared to CAD 13.4 million last year, an increase of CAD 52.6 million.

Risks associated with investment

The performance of the company’s business is prone to several risks which affect income, liquidity, risks related to resource supply, suppliers, customers, competition, and foreign exchange exposure. COVID-19 is directly impacting the company as the Gross costs associated with COVID-19 was approximately CAD 19 million in this quarter, we believe that if the restrictions prevail, the operations of the company might suffer.

Valuation Methodology (Illustrative): EV to Sales

 All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation 

The company is focused on improving its Adjusted EBITDA margins of the meat protein segment from 12% to between 14-16%, which is also their bread and butter segment. The group is also going for the expansion of the London, and Ontario poultry facility, as well as other projects to enhance the capacity. The company increased annual dividend from CAD 0.58 to CAD 0.64 and an increase in their free cash flow gives a cushion to business operations. Therefore, based on the above rationale and valuation, we have given a “BUY” rating at the closing price of CAD 24.36 on 29 October 2020. We have considered Canadian Tire Corporation Ltd, Loblaw Companies Ltd, Metro Inc etc. as the peer group for the comparison.

MFI daily technical chart. Source: Refinitiv (Thomson Reuters)

Disclaimer

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