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 Highlights:

• Industry leading margins: The company commands a higher margin as compared to its peers, which is a key positive and indicates higher operational efficiencies. EBITDA margin and operating margin were recorded at 38.6% and 33.9%, respectively, in Q2FY21, which was higher than the industry median of 18% and 12.2%, respectively. Moreover, the company posted a significantly higher net margin of 27.2% in Q2FY21, as compared to the industry median of 7.7%.
• Prominent Brand presence: The group operates 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 reported that the unit growth has slowly recovered and prevailing close to the pre-pandemic levels, which is encouraging. Moreover, despite an economic slowdown, the company successfully opened 378 net new restaurants during the first half of FY21.
• Growth in Adjusted EBITDA: The performance of the company was supported by favorable performance from its Burger King and Tim Hortons brands. Adjusted EBITDA stood at USD 1,057 million in H1FY21, as compared to USD 802 million in pcp.

Q2FY21 Financial Highlights:

• QSR declared its quarterly result, wherein the group reported total revenues of USD 1,438 million, up from USD 1,048 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 quality menu items, coupled with the rapid adoption of the digital channels.
• Total operating costs and expenses came at USD 950 million, compared to USD 805 million in the previous corresponding period (pcp). The growth was driven by a higher cost of sales, coupled with a surge in general & administrative expense and advertising expense.
• Income from operations climbed USD 488 million, as compared to USD 243 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 391 million, reflecting a growth of 138.4% on y-o-y basis.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risk: Further restrictions to contain the spread of the virus would impact the company’s sales volume and would dampen the overall performance.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendations:

The company paid consistent dividends to its shareholders, despite economic turmoil. The above was supported by stable cash flow generation. The company operates with the leading brands within the Quick Service Restaurant segment and has a worldwide presence along with an impressive consumer base, which ensures sustainable cash flows to the organization. Notably, the stock carries a dividend yield of ~3.36%, which looks decent considering the current 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 closing price of CAD 78.63 on September 29, 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 September 29, 2021). Source: REFINITIV, 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 Q2 2021: The group once again delivered strong results in the second quarter with record sales volumes in the first half of 2021. It recognized a revenue of USD 330 million representing a 33% increase from the previous corresponding period, primarily due to higher average realized gold equivalent price and increased number of gold equivalent ounces sold.
• Robust free cash flows: On the back of agile management, record revenues and higher average realization price of metal In Q2 2021, the company generated an operating cash flow of USD 216 million, with the USD 65 million increase relative to the comparable period of the prior year.

• Future guidance on production: In 2021, the company expects 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 will 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.

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 Q2 2021, which is a key positive. The chart below gives a glimpse of this.

• Increasing quarterly dividend: Recently the company declared its third quarterly cash dividend payment for 2021 of USD 0.15 per common share, an increase of 50% relative to the comparable period in 2020 and representing the fourth quarterly dividend increase in a row, which is praiseworthy.

Source: Company

Financial overview of Q2 2021

Source: Company 

• In Q2 2021, the company reported higher revenue at USD 330.3 million against USD 247.9 million in the previous corresponding period. Increased revenue was mainly due to a 24% increase in the average realized gold equivalent price, coupled with a 7% increase in the number of gold equivalent ounces sold.
• The gross profit stood at USD 181.6 million, against USD 124.0 million in Q2 2020. The company witnessed a drop in its total cost of sales at 45% V/s 49.9%, which helped to grow gross profit.
• Income from operations stood at USD 163.1 million in the reported period against USD 102.2 million in pcp.
• The company’s net income in the reported period pumped at USD 166.1.0 million, against USD 105.8 million in pcp. The rise in net income was mainly due to higher gross profit, lower cost of sales, 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 their profitability and cash flow. Any drawdown in the gold prices would impact the group’s performance. 

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

In the reported second quarter, the business delivered an outstanding performance and is on track to meet its 2021 forecast of 720,000 to 780,000 gold equivalent ounces. Wheaton produced record revenue and cash flow of USD 655 million and USD 449 million in the first half of 2021, thanks to record sales volumes. This solid performance reflects the underlying strength of its diversified, high-quality portfolio, and has resulted in an increase to the dividend for the fourth quarter in a row, an increase of 50% over the prior year, which is appreciable. Additionally, it leaps the industry median margins on many fronts in Q2 2021, which is a key positive. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock at the closing price of CAD 47.93 as on September 29, 2021. We have considered Franco-Nevada Corp, Osisko Gold Royalties Ltd., as the peer group for the comparison.

*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 September 29, 2021). Source: REFINITIV, Analysis by Kalkine Group

Metro Inc.

Metro Inc (TSX: MRU) is one of the largest grocery retailers in Canada. The company has prominent grocery banners like Metro, Metro Plus, Super C, and Food Basics under its hood. Within its pharmaceutical segment, the group operates through the Jean Coutu and Brunet trademarks.

Key Highlights:

• Increase in cash flows: The company reported a higher cash flow of CAD 1,168.0 million in 9MFY21, as compared to CAD 1,058.3 million in pcp. The increase was supported by improved capital management coupled with higher earnings before income taxes. A higher cash flow is a key positive as it supports the overall liquidity of the company.
• Increase in dividend amidst turbulent times: The company has increased its dividend payment in the recent past despite a sluggish economic scenario, which is a key positive. In 9MFY21, the company reported total dividend distribution of CAD 2 million, which higher than CAD 164.3 million in pcp.
• Online Segment to contribute future growth: The company’s performance was benefitted from its online segment, which grew 19% on y-o-y basis in Q3FY21. Due to the ongoing pandemic, there has been a gradual shift in consumer tastes and preferences, and we believe the momentum to continue in the coming days. Notably, in order to cater for the growing demand, the company has a dedicated store in Montréal, which is allocated for online grocery.
• Higher traction from Pharmacy segment: The group is witnessing solid demand within the Pharmacy segment, wherein same-store sales were up 7.6% in Q3FY21, supported by an increase in prescription drugs coupled with a 3.8% increase in front-store sales. We believe volume from prescription drugs is likely to continue in the coming quarters, which would further support the company upcoming sales.

Q3FY21 Financial Highlights:

• MRU declared its third quarter result, wherein the group reported its sales of CAD 5,719.8 million, slightly lower than CAD 5,835.2 million in pcp. The decline of 2% on y-o-y basis was primarily due to a 6% y-o-y decline in Food same-store sales, partially offset by improved Online food sales.
• Operating income before depreciation and amortization stood at CAD 6 million, slightly lower than CAD 542.9 million in pcp. The decline was due to a lower income, coupled with a higher depreciation, partially offset by lower cost of sales & operating expenses.
• Net earnings stood came at CAD 252.4 million, declined from CAD 263.5 million in pcp. The bottom-line was partially supported by a lower income tax expense.

Q3FY21 Income Statement Highlights (Source: Company Reports)

Risks: Increase in restriction might result in a lower sales volume and the overall performance might be affected. Moreover, changes in consumer preferences might impact the demand for certain items, such as beauty products, cosmetics and cold and flu products.

Valuation Methodology (Illustrative): Price to Earnings 

Stock Recommendation:

The group commands a higher margin than the industry peers, which indicates higher operational efficiency. Gross margin and operating margin stood higher at 19.8% and 6.7%, respectively in Q3FY21, as compared to the industry median of 21.7% and 3.8%, respectively. Moreover, the net margin was recorded at 4.4% in Q3FY21, as compared to the industry median of 2.5%. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 60.77 on September 29, 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 September 29, 2021). Source: REFINITIV, Analysis by Kalkine Group

Enghouse Systems Limited

Enghouse Systems Limited (TSX: ENGH) is a Canada-based provider of software and services to a variety of end markets. The company operates through two segments, namely the Interactive Management Group and the Asset Management Group. 

Key Highlights:

• Constant Decline in total borrowings: The company has successfully lowered its total debt during the last five quarters, which is a key positive and indicates prudent capital management. Notably, total borrowings stood at CAD 29.5 million, which is the lowest in the last five quarters. A lower borrowing led to higher financial flexibility and lower interest expenses.            

• Robust profitability margins: The company commands a higher margin than the industry peers, which is worth mentioning. EBITDA margin and operating margin stood at 35.4% and 23.9%, respectively, in Q3FY21, which was higher than the industry median of 8.7% and 1.3%, respectively. Net margin was recorded at 18%, as compared to the negative industry median of 3.6%.
• New Acquisition to support future growth:  The company recently acquired two companies, namely Nebu BV and Momindum SAS, during the third quarter of FY21, which is expected to enhance its presence within the market research and video communications segment and would enable the group to capture additional opportunities. Currently, the company is focusing on onboarding the Nebu and Momindum team and align their processes with its existing operations for a better outcome.

Q3FY21 Financial Highlights:

• ENGH declared its quarterly result, wherein the company reported revenue of CAD 117.644 million, down 10.4% on y-o-y basis. The slide was primarily due to a lower income from Software licenses and hosted and maintenance services segments, partially offset by improved performance from Professional services segment.
• Result from operating activities was recorded at CAD 38.507 million, down from CAD 42.198 million in pcp. The decline was primarily due to lower revenue, partially offset by lower direct costs and operating expenses.
• Income before income taxes stood at CAD 27.005 million as compared to CAD 33.323 million in pcp. The slide was due to a lower income from operating activities coupled with an increase in the other expense.
• Net Income for the period stood at CAD 21.227 million, as compared to CAD 25.993 million in Q3FY20, due to the above-mentioned facts.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks:  In order to remain afloat within the industry, the products require constant innovations and upgradation. Moreover, the arrival of a new player with a better offering might lead to price competition and loss of market share. 

Valuation Methodology Illustrative: Price to Cash Flow 

Stock Recommendation:

The company delivered a higher dividend of CAD 106.853 million in 9MFY21, significantly higher than CAD 19.496 million in pcp. The above is encouraging as most of the companies are lowering their dividend distribution in order to retain their liquidity. 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 Open Text Corp, Doebo Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 55.08 on September 29, 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 September 29, 2021). Source: Analysis by Kalkine Group

Hudbay Minerals Inc.

Hudbay Minerals Inc. (TSX: HBM) is a Canadian mining company with its operations, property developments, and exploration activities across the United States. The major mines that Hudbay operates are located in Manitoba, Canada, Arizona, United States and Peru.

Key Highlights:

• Strong surge in Cash flows: The company registered a strong growth in cash from operations at USD 148.172 million in H1FY21, which was significantly higher than USD 40.455 million in pcp. The above was supported by a reduction in net losses.
• Operational Update: The company identified three new deposits from its Copper World project located on fully owned private land in Arizona, which resulted in a total of seven deposits from the above mine. The mine is situated beside the company’s Rosemont copper project, and the recent drilling confirmed the presence of significant shallow copper oxide and sulphide mineralization. The corporation is focusing on testing the opportunity to use reverse circulation drilling to fast-track future infill drilling programs in the coming quarters.
• Ample liquidity to conduct future operations: The company reported liquidity of USD 294.3 million in cash and cash equivalents, coupled with an undrawn availability of USD 295.2 million under its credit facilities. The current liquidity levels seem to be sufficient to withstand the company’s upcoming working capital and capital investments.
• Promising prospects from the New Britannia mill: Recently, the company started its operations from its New Britannia mill, which is located in Snow Lake, in Manitoba region. The group conducted refurbishment activities of the above mill in June 2021, followed by commissioning and startup activities in July 2021. The group expects significant contribution from the above project from Q4FY21 onwards, which would further support the company’s production.

Q2FY21 Financial Highlights:

• HBM impresses with its quarterly result, wherein the company posted revenue of USD 404.242 million, which surged from USD 208.913 million in the previous corresponding period (pcp).
• The company reported a gross profit of USD 82.182 million, as compared to a gross loss of USD 12.654 million in pcp.
• The quarter was marked by lower selling & administrative expenses, coupled with a decline in other expense, partially offset by a significant surge in exploration & evaluation expenses (USD 12.571 million v/s USD 2.192 million in pcp).
• Loss for the period lowered to USD 3.395 million, from USD 51.901 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The group’s financial performance is dependent on the prices of the underlying commodities it deals in. Hence, volatility in commodity price would affect the financial performance of the group.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation

In the recent past, the company recorded higher realized metal prices, coupled with higher copper and gold sales volumes, which has supported the topline growth. Moreover, the company is focusing on cost optimization and reported an Adjusted EBITDA of USD 247.4 million in H1FY21, significantly higher than USD 104.1 million in pcp. Notably, the company generated ~USD 2.2 billion of EBITDA and ~USD 650 million of free cash flow during the last five years and amidst a volatile copper price scenario, supported  by an un-hedged production and stable low-cost profile. 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 Copper Mountain Mining Corp, Teck Resources Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 7.66 on September 29, 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 September 29, 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.