Home Capital Group Inc.

Home Capital Group Inc. (TSX: HCG) offers residential and non-residential mortgage lending, securitization of residential mortgage products, consumer lending and credit card services. During the quarter, the Company purchased 517,880 Common Shares as treasury shares for a price consideration of CAD 14.1 million.

Q1FY20 Financial Highlights: HCG impresses with its quarterly performance and reported net interested income of CAD 114.45 million, higher than CAD 91.78 million in the previous corresponding period, aided by a higher interest income on loan. Net interest margin increased to 2.38% from 2.31% in pcp. The Bank reported total revenue of CAD 127.15 million, higher than CAD 103.82 million in pcp. Despite higher revenue, net income remained more or less flat at CAD 27.71 million as compared to CAD 27.82 million primarily due to higher provision for credit losses and unrealized losses on securities and loans. Total loan portfolio stood at CAD 17.12 billion at the end of Q1FY20, reflecting a marginal decline of 0.2% from Q4FY19. HCG’s Total deposits stood at CAD 13.95 billion in Q1 FY20, as compared to CAD 13.72 billion at the end of Q4FY19. Total Assets Under Administration stood at CAD 25,066.75 million, while the group reported Tier 1 Capital Ratio stood at 17.73%.

Q1FY20 Income Statement Snapshot (Source: Company Reports) 

Valuation Methodology: Price to Book Based Relative Valuation (Illustrative)

Price to Book Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock of HCG corrected ~40% so far this year as investors choose to stay out of the equity markets on account of COVID 19 pandemic and the broader market witnessed a huge panic selling. The group reported a decent quarterly result, amidst a weak macro scenario, which is notable. The group’s bottom-line was marred by higher provisioning of credit losses. However, it is likely to provide cushion from defaults if they occur in the near term. HCG reported an improved net non-performing loan as a percentage of the gross loan at 0.36%, as compared to 0.49%, which is commendable. The Company is offering competitive products, enhancing its outreach within the broker community and upgrading its service experience through technological innovation and process re-engineering. The stock showed a short-term bullish pattern as it was trading above its 20 days and 50 days SMA of CAD 17.7 and CAD 16.81. The stock witnessed a pull-back rally and generated a return of ~11% in the last one month, outperforming the index by a decent margin. We believe, the current correction offers a good entry point for the investors. We have valued the stock using Price to Book multiple based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered Equitable Group Inc (TSX: EQB), Genworth MI Canada Inc (TSX: MIC) and ECN Capital Corp (TSX: ECN) etc. as a peer group. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 19.38 on May 29, 2020.

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

Timbercreek Financial Corp.

Timbercreek Financial Corp. (TSX: TF) is a leading non-bank, commercial real estate lender providing shorter-duration, structured financing solutions to commercial real estate investors.

Q1FY20 Financial Highlights: For the period March 31, 2002, TF reported its quarterly results, wherein the Company reported net investment income of CAD 24.08 million, as compared to CAD 24.511 million in pcp. Income from operations stood at CAD 20.28 million, slightly lower from CAD 20.73 million in the previous corresponding quarter, on account of higher service fees and general and administrative costs. Net income and comprehensive income stood significantly lower at CAD 7.42 million, as compared to CAD 13.13 million in Q1FY19 majorly due to the inclusion of fair value loss on derivative contract amounting to CAD 5.80 million, supported by a lower financing cost on credit facilities. At the end of the quarter, TF reported that 85.2% of the mortgage investments were secured by income-producing properties. The Group declared a monthly cash dividend of CAD 0.0575 per common share, payable on June 15, 2020.

Valuation Methodology: Price to Book Based Relative Valuation (Illustrative)

Price to Book Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock of TF corrected ~14% in the last six months. The stock is offering a healthy dividend yield of 8.2% on an annualized basis, which is lucrative, looking at the current interest rate scenario. The operating metrics of TF remained strong, and there was a negligible impact on the interest and principal payments for April 2020. The group has not witnessed any sign of deterioration in its portfolio to date. The group stated some of the loans coming due would likely have to be extended. However, extend loans would generate fee income for the business. The group has a stable capital base and strong market presence and positioned well to navigate through a challenging environment. The stock made a bounce back and reported a ~8% growth in the last one month and is trading above its 20-days and 50-days SMA of CAD 7.96 and CAD 7.59, respectively, which indicates a short-term bullish pattern. We have valued the stock using Price to Book based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Atrium Mortgage Investment Corp (TSX: AI), Home Capital Group Inc (TSX: HCG), Equitable Group Inc (TSX: EQB) etc. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 8.30 on May 29, 2020.

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

Corby Spirit and Wine Limited

Decent Increase in Revenue and Net Earnings: Corby Spirit and Wine Limited (TSX: CSW.A) is a Canadian manufacturer, marketer importer, and distributor of spirits and wines. As on 24 May 2020, the market capitalization of the company stood at CAD393.24 million.

Quarterly Performance (For the Period Ended 31 March 2020): During the third quarter ended 31 March 2020, revenue of the company witnessed an increase of 7% to CAD0.7 million. This reflects strong sales of Corby-owned brands partially resulting from COVID-19 related shifts in consumer purchasing trends. In the same time span, the company reported net earnings of CAD5.2 million, reflecting an increase of 15% on the prior corresponding period. Besides the business results, the company has organized the production and donation of hand sanitizer. The decent financial performance of the company amidst the global pandemic enabled the Board to declare a dividend of CAD0.20 per share payable on 12 June 2020.

Quarterly Operational Performance (Source: Company Reports)

What to Expect: The COVID-19 pandemic has had an unprecedented impact on markets; however, the strong results of the company ensured that its brands would continue to drive decent top-line growth. Corby has designed its business strategy to maximize sustainable long-term value growth and deliver enhanced margin quality and profit. The company is focused on capturing market share and is investing to leverage the growth potential of its key strategic brands. CSW.A is exploiting new routes-to-market and channel opportunities and is pursuing opportunities outside Canada.

Stock Recommendation: The company is setting clear strategies and increasing efficiencies to determine overall success and hence is creating value for its shareholders. The business model of the company and its portfolios provides an excellent platform for the investors to achieve their objectives. Despite the outbreak of the coronavirus, the company has shown good resilience. The stock of CSW.A is trading at slightly above the average levels of its 52-weeks’ band of CAD13.46 to CAD18.50 and holds further potential for growth. The stock of CSW.A gave a return of 5.33% on the YTD basis and a return of 2.4% in the past one month. On a TTM basis, the stock of CSW.A is trading at an EV/Sales multiple of 2.6x, lower than the industry average (beverages) of 4.6x. It is also trading at an EV/EBITDA multiple of 8.5x, lower than the industry average (beverages) of 10.4x on a TTM basis. Considering the trading levels, decent returns, resilience of business amidst the global pandemic and positive outlook, we recommend ‘Speculative Buy’ the stock at the current trading price of CAD 16.20, on 29 May 2020.

CSW.A Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Pizza Pizza Royalty Corp.

PZA Ready to Ride the Growth Wave: Pizza Pizza Royalty Corp. (TSX: PZA) owns and franchises quick-service restaurants under the Pizza and Pizza73 brands. As on 24 May 2020, the market capitalization of the company stood at CAD205.31 million.

Quarterly Performance (For the Period Ended 31 March 2020): During the third quarter ended 31 March 2020, System Sales from the 749 restaurants in the Royalty Pool witnessed a decline of 6.1% to CAD125.8 million from CAD133.9 million in the prior corresponding period. This was a result of the negative impact of the COVID-19 pandemic and the change in the number of restaurants in the Royalty Pool. The key driver of the growth of the company, Same Store Sales decreased by 6.6% due to the change in the customer check and customer traffic. However, the delivery and pickup sales of the company were stable and hence delivered operational excellence through these unprecedented market conditions. The Board has announced its monthly cash dividend of CAD0.05 per share which will be paid on 15 June 2020.

Quarterly Operational Highlights (Source: Company Reports)

What to Expect: The medium and long-term impact from COVID-19 will be dependent on consumer behavior after the reopening of the economy, the financial solutions achieved with government and lenders and the macro impact on the overall economy.

Valuation Methodology: Price to Earnings Multiple Based Valuation (Illustrative)

Price to Earnings Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: As per TSX, the stock of PZA is trading above the average levels of its 52-week band of CAD5.27 to CAD10.4 and hence holds the potential for further growth. The company has been negatively impacted by the outbreak of COVID-19, but the situation of the company remains fluid. The delivery and pickup sales of the company were stable and are actively taking additional measures to drive

growth in delivery business. During 1H20, EBITDA margin of the company stood at 98.6%, higher than the industry median of 14.1%. In the same time span, net margin of the company was 77% as compared to the industry median of 2.5%. The stock of PZA gave a return of 3.86% in the past one month. Considering the decent returns in the past one month, current trading levels, resilient financial position and positive outlook, we have valued the stock using the price to earnings multiple based illustrative relative method and have arrived at a target upside of lower double-digit (in percentage terms). Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 8.68 on 29 May 2020.

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