Innergex Renewable Energy Inc

Resilient Business Bodes Well for Growth: Innergex Renewable Energy Inc. (TSX: INE) is a leading renewable power producer. Innergex operates a large portfolio of hydro, solar, and wind energy facilities in Canada, the United States, Chile, and France. The company has interests in 68 operating facilities (including 37 hydro facilities, 26 wind farms, and five solar farms) with a net installed capacity of 2,588 MW.

Recent updates:

• On April 23, Innergex stated that it will announce its first quarter result on May 12.

• On March 27, Innergex announced that it has ample liquidity to weather the current crisis following the COVID-19 outbreak. Moreover, all of its renewable energy production facilities are operational. Investors should note that Innergex is an essential service provider, implying that its business remains relatively immune and it is likely to generate stable cash flows. Also, the firm announced that it has CAD 700 million in revolving and CAD 35 million in cash. Further, Innergex has no debt maturities in the near term (before 2023).

Financial highlights: IN 2019, Innergex reported total production of 6,509.6 Gwh. The company’s production was about 96% of its long-term average. As for the full year, Innergex reported revenues of CAD 557.0 million, up 16% y-o-y. Adjusted EBITDA jumped 16% y-o-y to CAD 409.2 million, with adjusted EBITDA margin of 73.5%, up 30 basis points. Notably, the adjusted EBITDA proportionate increased by 21% y-o-y to CAD 516.8 million. Despite higher revenues and EBITDA, the company posted adjusted net loss from continuing operations of CAD 25.8 million, as compared to the net earnings of about CAD 14.0 million the prior year. The y-o-y decline reflects higher deferred income tax expenses and unrealized net loss on financial instruments. Meanwhile, increase in finance costs and depreciation and amortization further remained a drag.

Innergex had total debt of CAD 4,691.7 million. The company declared dividends of CAD 95.0 million in 2019, up from CAD 90.2 million in 2018. Moreover, the company’s payout ratio was 102%. Cash Flow from operating activities stood at CAD 240.1 million, while Free Cash flows stood at CAD 93.3 million.   

Financial Highlights (Source: Company Reports)

Valuation Methodology: EV/EBITDA

EV/EBITDA Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months 

Stock recommendation: Innergex provides essential services and all of its production facilities continue to operate despite challenges from the COVID-19 outbreak. The company’s business model is resilient to economic cycles which are reflected in its stock price. Notably, Innergex stock is up about 14.4% so far this year. The company’s 95% of the revenues are contracted with government-owned or government-backed utilities. What it means is that Innergex will continue to produce stable revenues and cash flows irrespective of the current crisis. Investors should note that the company’s 2019 profits were impacted by deferred income tax expenses and unrealized net loss on financial instruments, which would not be there in 2020, implying that Innergex could return to profit in 2020. Further, Innergex is a perfect income stock, thanks to its stable cash flows and high payout. It offers a dividend yield of 3.7%, which looks attractive. Currently, Innergex stock trades at premium when compared to the peer group average. However, the company’s premium valuation is justified, thanks to its stable revenues and cash flows. Moreover, the company continues to advance strategic investments, which could boost growth further. We have valued the stock using EV/EBITDA based relative valuation with a target multiple of 15.5x. We have arrived at a target price which implies low double-digit upside in percentage terms. Hence, we recommend a ‘Buy’ on INE stock at the closing price of CAD 19.29 on April 29, 2020.  

INE One-Year Daily Price Chart (Source: Thomson Reuters)

Saputo Inc.

Defensive Sector, Recent Price-correction offers a Good Entry-Point: Saputo Inc. (TSX: SAP) is a leading dairy company, which produces and markets a wide array of dairy products like cheese, fluid milk, extended shelf-life milk and cream products etc., and has presence across 50 countries. The Company derives its majority revenue from the U.S. market (~48%) and from Canada (~30%), respectively. The Group operates through brands like Saputo, Armstrong, Frigo, and Stella etc.

Q3 FY20 Financial Highlights: For the period ended December 31, 2020, Saputo Inc. posted a revenue of CAD 3.891 billion, depicting a growth of 8.8% on y-o-y basis. The increase was driven by a positive contribution from two acquisitions coupled with improved price realization, and favorable product mix. Adjusted EBITDA stood at CAD 417 million, reflecting a surge of 29.8% over Q3FY19, thanks to the revenue growth. The Company reported a higher depreciation and amortization costs of CAD 121.8 million, as compared to CAD 80.7 million in the previous corresponding quarter. The Group reported adjusted net earnings of CAD 204.2 million, as compared to CAD 174.4 million in Q3FY19. The y-o-y increase in its bottom line reflects benefits from higher revenues and EBITDA. However, higher interest expenses remained a drag.         

Q3FY19 Income Statement Highlights (Source: Company Reports) 

Valuation Methodology (Illustrative): Price/Earnings based Approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock corrected ~22% in the last one year. However, it recovered ~7% return in the last one month. At the current price, the stock is trading above its 20 days and 50-days simple moving average (SMA) of CAD 34.79 and CAD 35.07. The company has strong presence across the North American market with diversified offerings to cater to the changing consumer needs. The company is backed by solid financials and we expect the group will be benefitting from the recent acquisitions. Further, the company is focusing on several cost controlling measures in order to weather the current crisis and to improve its margins and cash flows. Being in the consumer staples business, Saputo remains immune to the economic cycles, and the recent correction in price presents a good entry point. We have valued the stock using Price to Earnings based relative valuation and considered Metro Inc (TSX: MRU), Loblaw Companies Ltd (TSX: L), Dollarama Inc (TSX: DOL) etc. as peer group and arrived at a target price which implies a potential upside in low double-digit (in percentage terms). Hence, we recommend a ‘Buy’ on SAP stock at the closing price of CAD 35.74 on April 29, 2020.

SAP One-Year Daily Price Chart (Source: Thomson Reuters)

Silvercorp Metals Inc.

Rising Metal Prices, Benefit from Acquisition to Improve Cash Flows: Silvercorp Metals Inc. (TSX: SVM) is a Canadian mining company which produces silver, lead and zinc metals in concentrates from mines in China.

On April 27, the company announced the acquisition of Guyana Goldfields. The addition Guyana Goldfields is likely to boost the company’s financials by diversifying its cash flows.

Recently, the Company acquired 8,670,104 common shares under its share repurchase program, representing ~5% of the company’s outstanding shares.

Q3FY20 Financial Highlights: For the period ended December 31, 2020, SVM posted sales of US$ 44.51 million, as compared to US$ 42.35 million in the previous corresponding quarter. The increase was largely driven by a double-digit growth in silver revenues coupled with strong revenues from the zinc segment. Income from operations stood lower at US$ 12.43 million, as compared to US$15.98 million in Q3FY19, due to the higher cost of sales and foreign exchange loss, partially offset by a decline in general & administrative costs and other income. Net income stood at US$ 8.72 million, lower than US$ 10.85 million in the previous corresponding quarter due to lower income from the operation, partially offset by a slump in finance costs and income tax expense. The Company made a capital expenditure of US$ 7.91 million, higher than US$7.61 million in the previous corresponding period. The Group exited the quarter with cash and cash equivalents of US$ 61.89 million, lower than US$67.44 million in pcp.

Q3FY20 Financial Highlights (Source: Company Reports)

Stock recommendation: The stock of SVM generated a stellar return of ~87% in the last one year. However, the stock has corrected more than 20% so far this year, which presents a goo entry point. Notably, the stock is trading above its 200-day moving average of CAD 5.58, which shows investors confidence in the stock irrespective of the market doldrum. The business continues to benefit from favorable operating environment including higher volumes and increase in realized prices for silver. The Group has resumed its operation in China and does not expect any shortages in supply. Besides, the company announced the acquisition of Guyana Goldfields, which is likely to boost the company’s financials. With the acquisition, SVM will now have two profitable silver mines in China and a gold mine in Guyana. The company has a strong balance sheet and seems to have ample liquidity to fund its growth initiatives and weather the current crisis. Also, SVM stock is trading at a forward EV/Sales multiple of 3.6x, which is well below the industry average (metals & mining) of 20.2x. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 5.65 as on April 29, 2020.

SVM One-Year Daily Price Chart (Source: Thomson Reuters)

Secure Energy Services Inc. 

Beaten-down stock with Improving prospects: Secure Energy Services Inc. (TSX: SES) provides integrated treatments and disposal service to the oil and gas industries which constitute midstream services, environmental services, systems and products for drilling, production and completion fluids, and other specialized services and products. 

On account of the COVID 19 crisis, the management has taken some prudent measures like lowering its FY20 capital spending followed by a reduction in the operating activities, which would ultimately cushion the liquidity of the company.

Q1FY20 Financial Highlights: SES announced its quarterly results, wherein the revenues came in at CAD 611.09 million, as compared to CAD 788.88 million in the previous corresponding quarter. The decline in Midstream Infrastructure revenues due to the falling crude oil prices impacted the top-line. SES reported an operating loss of CAD 18.562 million, as compared to an operating profit of CAD 4.67 million in Q1FY19. The decline was on account of the lower revenue and inclusion impairment and restricting costs of CAD 25.096 million, which was offset by a lower cost of sales and lower general and administrative expense. Net loss for the quarter stood at CAD 22.41, as compared to a profit of CAD 1.26 million. The Company reported a 75% y-o-y increase in the capital expenditure to CAD 4.36 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: SES stock has marked a significant decline of ~84% in the last one year. Moreover, it is still down by about 74% so far this year. A slump in production and lower oil prices has taken a toll on the stock. However, the company has low counterparty risk. Meanwhile, it maintains a strong liquidity position which is likely to help the company in surviving the current crisis. In the first quarter, the company moved ahead on the construction of its East Kaybob Oil Pipeline. The project provides long-term fee-for-service revenues from tariffs and reliable volumes.  Further, over the years, the company’s investments in oil feeder pipelines, water disposal facilities, and crude oil storage has helped it to transform its business with more exposure on production-based revenues backed by long-term contracts. We believe the sharp decline in the stock indicates that the negatives are already priced. Besides, the massive decline in stock price presents a good buying opportunity. SES stock is trading at an EV/EBITDA of 4.4x on the TTM basis, as compared to the industry (Oil & Gas Related Equipment and Services) median of 6.1x. Hence, we recommend a ‘Speculative Buy’ on the stock at the closing price of CAD 1.29 as on April 29, 2020.

SES One-Year Daily Price Chart (Source: Thomson Reuters)

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