Restaurant Brands International Inc.

Restaurant Brands International Inc. (TSX: QSR) is a leading global quick-service restaurant chain and derives its revenue primarily from franchise royalties and distribution sales to franchisees. 

Key Updates:

• Revival in demand: In Q3FY21, the company reported a strong revival in demand supported by 10.8 % y-o-y growth in System-wide Sales Growth. The group’s primary brands like Tim Hortons and Burger king reported a growth of 11.1% and 12.3% on a y-o-y basis. During the quarter, the company reported that on average, ~97% of its restaurants were open across the globe, which is higher than ~94% in Q3FY20. Moreover, the company also saw growth from its digital sales segment due to the changing preferences of the consumers. Notably, operating margin and net margin stood at 34.9% and 22%, respectively, in Q3FY21, significantly higher than 31.2% and 16.7%, respectively, in pcp.
  

• Improved financial metrics on a year-to-date basis: On a year-to-date basis, the company posted solid growth in its top-line and profitability, which suggests a demand recovery and is a key positive. Notably, revenue and adjusted EBITDA stood at USD 4,193 million and USD 1,664 million in 9MFY21, reflecting a y-o-y growth of 16.15% and 22.08%, respectively.

• Prominent Brand presence: The groups operate through several well-established brands like Burger King® , Tim Hortons® and POPEYES®, and has a tremendous presence across more than 100 countries. Notably, the management clarified that the unit growth has gradually recovered from the pre-pandemic levels, which is encouraging.
  

Q3FY21 Financial Highlights:

• QSR declared its quarterly result, wherein the group reported total revenues of USD 1,495 million, jumped from USD 1,337 million in the previous corresponding period (pcp). The surge was driven by higher income from system-wide sales in all the brands, supported by the addition of innovative items to its portfolio, coupled with the rapid adoption of the digital channels.
• Total operating costs and expenses came at USD 962 million, stood higher from USD 920 million in the previous corresponding period (pcp). The quarter witnessed a higher cost of sales, coupled with a surge in general & administrative expense & advertising expense. Income from operations stood at USD 533 million, climbed from USD 417 million in pcp, supported by higher revenue, partially offset by an increase in total operating costs and expenses.
• The company reported its net income at USD 329 million, significantly higher than USD 223 million in pcp.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risk: Further imposition of restrictions would likely impact the company’s sales volume and would dampen the overall performance. Moreover, the company added new stores in the recent past, and a slowdown in operations would hinder the company’s return ratios. 

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendations:

The company paid consistent dividends to its shareholders, despite economic turmoil, supported by stable cash flow generation. The company operates with the leading brands within the Quick Service Restaurant (QSR) segment and has a worldwide presence along with an impressive consumer base, which ensures sustainable cash flows to the firm. Notably, the stock of QSR carries a dividend yield of ~3.740% on an annualized basis, which looks impressive considering the persisting interest rate scenario. We have valued the stock using P/E-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Mcdonald's Corp, Wendys Co etc. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 70.13 on October 28, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary:

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

Torex Gold Resources Inc.

Torex Gold Resources Inc. (TSX: TXG) is a gold mining company engaged in the exploration, development, and exploration of its wholly owned Morelos Gold Property.

Key Highlights:

• Industry beating margins: The company commands higher profit margins as compared to its peers, which is a key positive as it indicates improved operational efficiencies. Notably, the company posted its EBITDA margin and operating margin at 64.2% and 38.8%, respectively, in Q2FY21, higher than the industry median of 40.1% and 25.8% respectively. The company’s net margin stood higher at 29.5%, in Q2FY21, as compared to the industry median of 15.7%.
  

• Q3FY21 operation update: In Q3FY21, the company reported its gold production of 111,220 ounces. Average Plant Throughput stood at 12,500 tpd, while Average Open Pit Ore Mined came at 15,280 tpd during the quarter.

           Q3FY21 Operational Highlights (Source: Company Report)

• Morelos property showing promising prospects: In the recent past, the company made multiple targets for its drilling purpose and infill drilling program in the Morelos property while the drilling activities was expanded to 83,000 metres from 44,000 metres. The company conducted eight drill rigs and is focusing on extending its exploration program in 2022. As per the management, a significant portion remains unexplored across the Morelos region, and as per the magnetic anomalies report, the above property offers strong potential for mineralization in the coming days.

Q2FY21 Financial Highlights:

• TXG announced its quarterly result, wherein the group reported its metal sales of USD 205.9 million, soared from USD 109.1 million in the previous corresponding period (pcp). The growth was driven by higher gold sales (111,424 oz v/s 63,147 oz in pcp), coupled with higher average realized gold prices (USD 1,816/oz vs/ USD 1,712/oz in Q2FY20).
• Earnings from mine operations were reported at USD 86.2 million, climbed from USD 17.7 million in pcp, driven by higher income, partially offset by an increase in production costs (USD 68.4 million v/s USD 44.4 million in pcp).
• The company reported a net income of USD 60.7 million, significantly higher than USD 3.8 million in pcp. The quarter was marked by lower general & administrative expenses, while higher exploration & evaluation costs and an increase in foreign exchange expenses remained as a drag.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: Volatility in international prices would likely hinder the realization and would subsequently dampen the overall performance of the group. The company reported a lower production on y-o-y basis, and the continuation of the above trend would likely dampen the upcoming performance.

Valuation Methodology (Illustrative): Price to CF based

Stock Recommendation:

The group reported impressive operating performance in Q3FY21 and expects to reach the upper end of the guided range of 430,000 to 470,000 ounces in 2021, which looks promising. The group also showed prudent capital management, wherein it has reduced its total debt. A lower debt profile enhances the company’s overall financial flexibility and also reduces the finance costs of the company. 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 New Gold Inc, OceanaGold Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of TXG at the last closing price of CAD 14.66 on October 28, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary:

One-Year Technical Price Chart (as on October 28, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Kinross Gold Corporation

Kinross Gold Corporation (TSX: K) is a Canada based gold mining company whose projects are located in the United States, Brazil, Russia, Mauritania, Chile and Ghana. 

Key Highlights:

• On track to meet its revised production guidance: The company is on track to meet its revised production guidance of 2.1 million Au eq. oz. (+/- 5%) previously disclosed on June 21, 2021 and continues to expect production to increase in 2022 and 2023 to 2.7 million and 2.9 million Au eq. oz. (+/- 5%), respectively.
  

• Bullish long-term outlook from Chile: The company has a mining presence in Chile, where it works on projects such as La Coipa Restart and Lobo-Marte. The aforementioned sites have plenty of gold deposits, and more opportunities are likely to be discovered in the following days. Project La Copia is on schedule, with the first production set to begin in mid-2022. The business is undertaking a feasibility study in Lobo Marte, which is scheduled to be finished in the fourth quarter of 2021.

• Constant reduction in total debt: The company successfully reduced its total borrowings in the recent quarters, despite challenging macro scenario, which indicates prudent capital management. Notably, debt to equity ratio improved from 0.48 in Q2FY20 to 0.22 in Q2FY21. A lower debt provides higher financial flexibility and reduces interest costs.

Source: Company

• Started paying dividends: In the recent past, the company started distributing dividend after 2013, backed by strong cash flow generation. Notably, in H1FY21, the company reported total dividend distribution of USD 75.7 million, which is a key positive.
• Event update: The company will release its financial statements and operating results for the third quarter of 2021 on Wednesday, November 10, 2021.

Financial overview of Q2 2021 (Expressed in millions of USD)

Source: Company

• The company announced its Q2 2021 result, wherein it posted revenue of USD 1,000.9 million, compared to USD 1,007.2 million in Q2FY20. Average realized price of gold stood at (USD 1,814/ounce v/s USD 1,712/ounce in pcp). During the quarter, the company reported a lower production of 538,091 Au eq. oz, compared to 571,978 Au eq. oz. in Q2FY20.
• Gross profit stood lower at USD 315.1 million, as compared to USD 416.6 million in pcp mainly due to higher total cost of sales (USD 685.8 million v/s USD 590.6 million in pcp).
• The quarter was marked by a surge in other operating expense (USD 55.8 million v/s USD 52.9 million in pcp), an increase in exploration and business development costs (USD 34.0 million v/s USD 17.9 million in pcp). General and administrative cost also stood higher at USD 31.4 million v/s USD 24.7 million in pcp.
• Net earnings were reported at USD 118.4 million, decreased from USD 196.0 million in pcp due to higher input cost, partially offset by lower finance costs.
  

Risks associated with investment:

As the operations of the company depends on the gold prices, a correction in gold price is likely to dampen the company’s performance. Moreover, unable to add new mineral exploration would lower the company’s reserves. The company reported a slide in cash flows due to higher input costs, and continuation of the above trend would dampen the company’s overall performance.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company has a strong liquidity profile and has more than USD 2.2 billion of cash and available credit at the end of Q2FY21, which seems to be sufficient to fund its short term and long-term capital requirement. For FY21, the company expects its gold equivalent production of 2.1 million oz, wherein it has already produced 1.1 million oz during H1FY21. Furthermore, the company is continuously reducing its debt, which is a key positive. 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 Torex Gold Resources Inc, Dundee Precious Metals Inc, Yamana Gold Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 7.73 on October 28, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. 

Technical Analysis Summary:

One-Year Technical Price Chart (as on October 28, 2021). Source: REFINITIV, Analysis by Kalkine Group

Largo Resources Ltd

Largo Resources Ltd (TSX: LGO) is a natural resource development and exploration company having operation of mining and exploration properties located in Brazil and Canada. The company primarily explores for vanadium, iron, tungsten, molybdenum, chromite, palladium, and platinum group metals.

Key highlights

• Robust financial numbers: Steel and chemical industries have seen strong demand, and the aerospace industry is slowly resuming, which is an encouraging sign for the company.  In the reporting quarter, the organization sold 3,027 tonnes of V2O5, up 197% from Q2 2020, and earned USD 54.3 million in revenue, up 549% from Q2 2020. The similar positive trend was seen in net income.

• Preliminary Q3 2021 operational update: On the operational front, the company enhanced its performance in Q3 2021, with a 5% rise in output over Q3 2020 and a 6% increase over Q2 2021. Following the conclusion of the Company's expansion project in Q2 2021, greater throughput and enhanced recoveries contributed significantly to the outstanding production performance throughout the quarter.
  

• Vertically integrating into electrical energy storage systems: The company is transitioning to produce vanadium-based electrical energy storage devices, which is a strategic move. The Company believes that vertically integrating its financially strong vanadium operations with its superior vanadium redox flow battery ("VRFB") technology will provide a higher value market opportunity for the Company's vanadium products in the future, as well as it would provide a unique competitive advantage in the rapidly growing long duration energy storage market.

• Improving operational efficiency: The Company maintained its pace and witnessed spirited performance across its gross margin, EBITDA margin, operating margin and net margin. We believe the momentum to continue in the foreseeable future, as the Company has big plans to support future growth. Higher average realized prices of the commodities also played a crucial role in achieving healthy revenues and margin.
  

Financial overview of Q2 2021 (Expressed in 000’s of U.S. dollars)       

Source: Company

• In Q2 2021, the Company sold 3,027 tonnes of V2O5 equivalent and clocked a revenue of USD 54.29 million, increased 549% compared to USD 8.35 million in the previous corresponding period.
• The company’s total operating expenditures increased to USD 40.11 million against USD 15.88 million in pcp.
• Net income before tax stood at USD 14.18 million compared to a loss of USD 5.53 million in pcp.
• The company also successfully transformed its net loss into net profit at USD 8.44 million compared to a loss of USD 7.0 million in pcp.

Risks associated with investment

Despite improved production results and steady vanadium demand in all regions, the Company experienced logistical challenges which resulted in lower sales for the quarter. Any continuation on this challenge can bring fatal results.

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

The company reported good earnings in Q2 2021, as demand remained strong in all of its core areas, with sales volumes increasing in the steel, aerospace, and chemical industries. The aircraft industry began to recover in Q2 2021, although it is still far behind pre-COVID levels due to the pandemic. Furthermore, it improved its performance in Q3 2021, with a 5% increase in output over Q3 2020 and a 6% increase over Q2 2021, which is a significant positive that accurately matches the optimistic possibilities. The company is also transitioning itself to produce vanadium-based electrical energy storage devices, which is a strategic move. We believe this would provide a unique competitive advantage in the rapidly growing long duration energy storage market. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock at the closing price of CAD 15.32 on October 28, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary:

One-Year Technical Price Chart (as on October 28, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Roots Corporation

Roots Corporation (TSX: ROOT) provides a portfolio of apparel, leather goods, accessories, and footwear for men, women, and children under the Roots brand. The company operates through two segments: Direct-To-Consumer (DTC), which accounts for majority revenue, and Partners & Other. The DTC segment sells products through the company's corporate retail stores and e-commerce.

Key highlights 

• Increasing demand offtake: Demand dynamics have been strengthened by the loosening of lockdown restrictions, as well as more individuals becoming immunized against the fatal illness and a rise in discretionary expenditure. It may also be judged by looking at its DTC sales, which climbed by 6.6% YoY and 16.4% YTD, owing to robust growth in store sales despite being closed for longer in Ontario, the company's largest market.
  

• Enlarging eCommerce reach: The retail clothes industry is experiencing a dramatic transition after being shattered by the COVID-19 outbreak. Traditional brick-and-mortar retailers are focusing their efforts on growing their e-commerce reach and presence. The company delivered significant eCommerce sales growth over pre-pandemic levels, despite year-over-year sales moderating as customers increasingly embraced in-store shopping again.
  

• Sequentially increasing gross margin and EBITDA margin: The company's gross margin and EBITDA margin are improving sequentially, which is a positive indicator. Its gross margin increased to 58.1% in Q2 2021 from 57.5% in Q1 2021, and EBITDA margin increased to 9% from 0.6%. Furthermore, compared to the industry, it has a superior gross margin, showing that the company is truly excelling.
  

  Financial overview of Q2 2021 (In thousands of CAD)

Source: Company

• In Q2 2021, the company’s revenue improved marginally by 1.8% to CAD 38.9 million compared to CAD 38.2 million in the previous corresponding period. This was primarily driven by 6.6% jump in the Direct-to-Customer sales to CAD 30.3 million V/s CAD 28.4 million reported in pcp.
• Gross Profit surged by 8.2% to CAD 22.6 million compared to CAD 20.8 million reported in pcp, mainly due to lower COGS.
• The company’s income before interest expense and income tax stood at CAD 0.7 million compared to a loss of CAD 0.4 million in pcp.
• Net loss for the reported period stood lower at CAD 1.1 million compared to CAD 1.8 million in Q2 2020.

Risks associated with investment

The company is exposed to variety of risks ranging from supply chain risks, resurgence of Delta variant of COVID-19, a fresh lockdown and travel restrictions, intense competition, forex risks, credit risk. Additionally, the company’s highly leveraged balance sheet is exposed it to interest rate risks 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The company's profitable growth in the third quarter demonstrates the value of its brand, devoted client base, and solid fundamentals. Its gross margin and EBITDA margin are improving sequentially, which is a positive indicator. Furthermore, it delivered significant eCommerce sales growth over pre-pandemic levels, despite year-over-year sales moderating as customers increasingly embraced in-store shopping again and increased eCommerce penetration aided the firm in lowering operational costs, resulting in a posting operating profit. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 2.92 on October 28, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary:

One-Year Technical Price Chart (as on October 28, 2021). Source: REFINITIV, 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.