Ritchie Bros. Auctioneers

Ritchie Bros. Auctioneers (TSX: RBA) operates the world's leading marketplace for heavy equipment. The group is a live auctioneer of industrial equipment and enhanced its operations across construction, agricultural, oilfield, and transportation equipment in a variety of venues.

Key Highlights:

• Increase in Total Gross Transaction Value (GTV) denotes revival in demand: In H1FY21, the company reported a total GTV of USD 2,802.182 million, reflecting a 6% y-o-y growth from the previous year. The increase was driven by very strong mix adjusted auction price performance aided by increased demand for used equipment, coupled with improved efforts from the company’s digital marketing segment. Moreover, in the recent past, the group’s performance was supported by a gradual economic scenario, coupled with the benefit from the use of new satellite yards across France, Germany and Australia. The company’s operations were supported by favorable foreign exchange impact.

• Surge in Cash Flows: The company reported a higher cash from operations of USD 211.387 million in H1FY21, which increased from USD 198.324 million a year ago. The increase was driven by higher net profit. The increase in cash flow is a key positive and indicates higher financial flexibility.

• Increase in Dividend distribution: Amidst the sluggish economic growth, the company reported higher dividend of USD 48.537 million, as compared to USD 43.586 million in pcp. The above is impressive, as most of the companies are lowering or suspending their dividend distribution in order to boost liquidity.

Q2FY21 Financial Highlights:

• RBA announced its quarterly result, wherein the company reported total revenue of USD 396.361 million, slightly higher than USD 389.050 million in the previous corresponding period (pcp). The increase was primarily aided by higher GTV due to improved performance within the Canada and International segment.
• Total operating expenses were recorded at USD 306.844 million, as compared to USD 300.250 million in the previous corresponding period. The increase was primarily attributable to a higher depreciation and amortization expenses coupled with a surge in selling, general & administrative expenses.
• Net income stood higher at USD 60.781 million, climbed from USD 53.119 million in Q2FY20.

Source: Company Report

Risks: A decline in Gross Transaction Value (GTV) due to lower demand within the heavy goods and construction segments might dampen the overall performance of the company.

Stock Recommendation:

In Q2FY21, the company reported an EBITDA margin and net margin of 28.9% and 15.3%, respectively, higher than the industry median of 16.3% and 3.4%, respectively. Moreover, the company has ample liquidity, which includes an unutilized amount of USD 448 million from its credit facility. We believe the above is sufficient to withstand the short-term working capital and capital investments needs. On the valuation front, the stock trades at an EV to Sales multiple of 4.5x on an NTM basis, as compared to the industry (Professional & Commercial Services) median of 6.2x. Hence, we give a ‘Hold’ rating on the stock at the closing price of CAD 76.99 on August 12, 2021.

One-Year Technical Price Chart (as on August 12, 2021). Source: REFINITIV, Analysis by Kalkine Group

Richelieu Hardware Ltd.

Richelieu Hardware Ltd. (TSX: RCH) is a Canada-based company that imports, manufactures, and distributes specialty hardware and complementary products. 

Key Highlights:

• Decline in total debt: At the end of Q2FY21, the company reported a solid reduction in its total debt to CAD 2.646 million, as compared to CAD 5.792 million in Q4FY20. The drastic decline in debt indicates improved financial flexibility and a lower interest expense, which further supported the company’s profitability. Moreover, the company has a healthy debt to equity ratio of 0.13x lower than Industry Median of 0.74x.
  

• Focusing on inorganic growth: The company closed 1 acquisition during the quarter and closed 2 acquisitions subsequently to quarter end.

Q2FY21 Financial Highlights:

• RCH announced its quarterly result, wherein the company posted sales of CAD 384 million v/s CAD 248.253 million in Q2FY20. The increase was driven by the positive impact of acquisitions coupled with organic growth. On a geographic front, income from Canada and United States grew 59.8% and 49.5% on y-o-y basis.
• Earnings before income taxes stood at CAD 799 million, higher than CAD 24.448 million in Q2FY20. The increase was driven by higher income, partially offset by higher operating expenses (CAD 310.430 million v/s CAD 214.483 million in pcp)
• Net earnings jumped CAD 551 million, from CAD 17.783 million in Q2FY20. The increase was driven by higher earnings before income taxes, coupled with lower net financial costs (CAD 0.630 million v/s CAD 0.708 million in Q2FY20).

Source: Company Report

Risks: The Company’s operations rely on general economic conditions and the economic aspects particularly related to the renovation and construction industry. The arrival of economic cycles could lead to a lower sale and might take a toll on the overall financial performance.

Stock Recommendation:

 At the end of Q2FY21, EBITDA margin stood at 16.4%, higher than 13.6% for the corresponding quarter of FY20. The improvement was driven by higher sales and a rigid cost structure, which subsequently supported the company’s operations. As per the recent trend, the hardware from both United States and Canada is witnessing a strong surge from hardware retailers and renovation superstores segment, which has supported the recent growth. We believe that all the positives are prices in at the current trading levels. On the valuation front, the stock is available at P/E multiple of 28.0x on NTM basis, as compared to the industry (Industrial) median of 18.0x. Hence, we recommend an ‘Expensive’ rating on the stock at the last closing price of CAD 43.56 on August 12, 2021.

One-Year Price Chart (as on August 12, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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