Constellation Software

Improved Cash Flow Driven by Strategic Acquisitions: Constellation Software Inc. (TSX: CSU) is engaged in managing and building of vertical market software (VMS) solutions.

Recent Highlight:

• During FY19, the group has reported several acquisitions at a price consideration of US$549 million, excluding deferred payments of US$139 million. 

• The company announced a dividend of US$1.00 per share, payable on 7^th April 2020. During FY19, Constellation Software paid a total dividend of US$509 million to its shareholders. 

• The company’s free cash flows marked healthy growth in FY19. Constellation Software posted free cash flows of US$ 590 million, up 6% y-o-y.

FY19 Financial Highlights for the period ended 31^st December 2019: CSU announced its full-year results, wherein the company posted revenues of US$ 3,490 million, implying a growth of 14% on y-o-y basis. The double-digit growth in its top line was driven by the positive impact of acquisitions, partially offset by a 1% decline in the organic revenue. CSU’s operating expenses increased by about 15% y-o-y to US$ 2,979 million, reflecting double-digit growth in staff expenses. Also, higher third party license, maintenance and professional services expenses, remained a drag. Depreciation of property and equipment increased 242% on y-o-y basis to US$ 92 million. The increase is primarily due to the depreciation expense associated with acquired businesses. Net income saw a fall of 12% year-over-year to US$ 333 million on account of higher expenses.

FY19 Income Statement highlights (Source: Company Reports)

Valuation Methodology: EV/Sales - Based Relative Valuation

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock Recommendation: CSU stock is quoting at CAD 1275.90 along with a market capitalization of 27.41 Billion. The stock price gained 12.7% in the last year beating the index by ~37.6% during the same time horizon. During FY19, the business reported its cash flows from operations to US$ 767 million, as compared to US$662 million in FY18. CSU exited the fourth quarter with cash of US$ 316 million and believes that it has sufficient cash and available credit capacity to continue to operate for the foreseeable future, considering the nature of the business. In the recent past, we have seen major decline in the global indices due to the outbreak of COVID-19. During the last one month, the stock outperformed the index by ~13.8%.The company’s outperformance comes on the back of its revenues that remain relatively immune to the economic cycles. Investors should note that CSU generates majority of revenues from the public sector, which ensures stable cash flows. Also, the company’s strategic acquisitions position it well to drive future growth. Inorganic growth and steady cash flows are likely to support the upside in its stock. We have valued the stock using the Enterprise Value to Sales based valuation metrics. For this, we have taken peers like Oracle Corp (NYSE: ORCL), Accenture PLC (NYSE: CAN), IBM (NYSE: IBM) etc. and arrived at a target price offering a lower-double digit upside (in % terms). Hence, we recommend a ‘Buy’ on the stock at the closing market price of CAD 1,275.90 on 30 March 2020.

CSU Daily Price Chart (Source: Thomson Reuters)

Maple Leaf Foods

Innovative Product to Aid Future Growth: Maple Leaf Foods Inc. (TSX: MFI) is a leading manufacturer of food products including ready-to-cook and serve meals, prepared meat, plant-based protein products and value-added fresh pork and poultry.

Financial Highlights: Maple Leaf Food posted revenues of CAD 3,941.5 million in 2019, implying a y-o-y growth of 12.8%. The double-digit growth in the company’s top line came on the back of robust performance in the Meat Protein segment coupled with a double-digit growth in the Plant Protein segment. Capital expenditures stood at CAD 270.7 million, which includes a construction capital of CAD 82.8 million, while the majority was related to long-term investments in the London poultry facility. For Q4FY19, Plant Protein segment reported a y-o-y sales growth of 31.5%, overall sales witnessed a y-o-y growth of 13.3%. FY19 net profit stood at CAD 74.6 million, as compared to CAD 101.3 million in FY18. The y-o-y decline in net earnings reflects higher SG&A expenses on account of increased advertising, promotion and marketing expenses related to Plant Protein Group. 

The company declared a quarterly dividend of CAD 0.16 per share (CAD 0.64 on annual basis), payable on March 31. MFI paid a total dividend of CAD 71.82 million during FY19, higher than CAD 65.12 million in the prior year. During FY19, the company repurchased 0.8 million shares worth CAD 20.3 million.

Financial Highlights (Source: Company Reports)

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation: MFI stock is quoting at CAD 23.87, with a market capitalization of CAD 2.99 billion. The stock has corrected by 7.8% year-to-date. However, it performed relatively better than the broader markets, which marked more than 23% decline. We expect the company’s defensive business do well in the coming quarters and support the upside in stock.  The company’s strong portfolio of leading brands, robust pipeline of innovative products and strong growth opportunity in the plant-based protein products are expected to drive the sales in the coming quarters. Higher sales coupled with operational efficiencies are likely to support profitable growth and support the upside in stock. We have valued MFI stock using EV/EBITDA valuation methodology. MFI stock trades at a premium when compared to the peers and we expect the multiple to expand further. We arrived at a target price, which implies low-double digit upside based on our target EV/EBITDA multiple of 10.6x. Hence, we recommend a ‘Buy’ on MFI stock.

MFI Daily Technical Chart (Source: Thomson Reuters)

Shopify

Shopify (TSX: SHOP) has generated stellar returns for its investors over the past several years. The company’s solid competitive positioning, consistent revenue growth, and product expansion have driven its stock higher. Investors should note that Shopify stock has been resilient to the recent stock market carnage and is up more than 18% so far this year as compared to a double-digit decline in the broader market. 

What is does: Shopify is a global technology company that provides tools and platform to retail businesses to “start, grow, market, and manage” their business. More than 1 million businesses across 175 countries use Shopify’s platform.   

Financial performance: Shopify has an impressive set of numbers. The company’s GMV or Gross Merchandise Volume and revenues have consistently grown at a solid double-digit rate over the past five years. In 2019, Shopify’s revenues jumped more than 47%% y-o-y to US$ 1,578.2 million. Meanwhile, its monthly recurring revenue or MRR has grown at a CAGR of 52% since the first quarter of 2015. GMV increased 49% y-o-y on top of 56% growth registered in the prior year. Thanks to the company’s robust sales, gross profit have also increased at a double-digit rate over the past several years. 

On the expenses front, Shopify has successfully managed to lower costs. The company’s adjusted operating expense rate has declined from 58% in 2015 to 53% in 2019, which is impressive.

The company during the fourth-quarter conference call announced that it expects revenues to be US$ 2,130 million to US$ 2,160 million in 2020. The projection implies a y-o-y growth of 35% to 37%. However, we expect that to change as the COVID-19 outbreak is likely to affect Shopify’s business. 

Valuation Methodology: EV/Sales - Based Relative Valuation

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation: The coronavirus pandemic has forced most of the businesses to shut stores and kept people locked down, leaving them the option to buy things primarily through e-commerce sites. Since Shopify provides tools to support online businesses, it could witness increased demand for its offerings. However, the caveat to this is that most of the company’s clients are small, which could go out of business amid the rapid rise of COVID-19 cases. We expect the global pandemic to impact these small businesses, in turn, Shopify stock.  However, the company’s solid business model and operational efficiencies bode well for growth. We recommend accumulating Shopify stock in stages. What we mean here is that investors should continue to buy Shopify stock at different price levels.

We have valued the stock using the Enterprise Value to Sales based valuation metrics. Notably, Shopify stock trades at a significant premium as compared to its peer group average. The company’s premium valuation is justified given its high growth profile. We expect the company’s valuation multiple to expand further and arrived at a target price, which implies low-double digit upside (in % terms) from the current level. Hence, we recommend a ‘Buy’ on the stock at the closing market price of CAD 611.52 on 30 March 2020.

SHOP Daily Price Chart (Source: Thomson Reuters)

Teranga Gold Corporation

Teranga Gold Corp (TSX:TGZ) engages in production and sale of gold. Also, it is involved in the exploration and development of mines. The gold company has produced more than 2 million ounces of gold at its Sabodala operations in Senegal. Moreover, it has about 3.7 million ounces of gold reserves (as of December 31, 2019).  We believe Teranga Gold remains well-positioned to drive future growth on the back of higher average realized prices and increased production. 

Recent financial performance: Teranga Gold posted revenues of US$353.49 million, reflecting a y-o-y growth of about 13%. Higher average realized prices and increased ounces sold drove the double-digit growth in the company’s top line. Gold sales increased by 5% y-o-y. Meanwhile, average realized prices increased by 8% in 2019. Gross profit increased 8% y-o-y, thanks to the higher prices and benefits from the Wahgnion's post commercial production revenues. Adjusted EBITDA jumped 15% y-o-y to US$130.2 million, reflecting higher gold ounces sold and increase in average realized prices. However, higher share-based compensation expenses remained a drag. The company posted adjusted net earnings of US$ 1.2 million, as compared to US$ 18.1 million in 2018. The sharp decline in net earnings reflects higher finance costs and increase in share-based compensation expenses. Also, higher tax remained a drag.

Financial Highlights (Source: Company Reports)

Recent update: On March 4, Teranga Gold announced that it has completed the acquisition of 90% stake in Massawa Gold Project. The acquisition of Massawa Gold Project is likely to reposition the company as low-cost mid-tier gold company.  

Valuation Methodology: Price/Cash Flow - Based Relative Valuation

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation: Shares of Teranga Gold has been resilient to the recent stock market crash. Teranga Gold stock has declined by 2.6% year-to-date, as compared to more than 23% drop in the broader market. The company recently announced that despite challenges from COVID-19 outbreak, its first quarter production, exploration, and development activities are going on as planned. We expect gold prices to remain high given the uncertainty surrounding the global economies, which is likely to support growth. We have used Price to Cash Flow based valuation metrics to value TGZ stock. TGZ stock’s forward Price to cash flow multiple of 3.9 is well below the peer group average of 7.1. We expect the multiple to expand in coming quarters. Based on our target multiple 4.75, we expect low-double digit upside in TGZ stock. We recommend a ‘Buy’ on TGZ stock at the closing price of CAD 6.8 on 30 March 2020.

 TGZ Daily Price Chart (Source: Thomson Reuters)

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.