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:

• Significant Reduction in total debt: The company has drastically lowered its overall debt in Q1FY21 from Q4FY20, which is encouraging. Total debt stood at CAD 4,414 million, as compared to CAD 5,792 million in Q4FY20, reflecting a reduction of ~31% on a sequential basis. A decline in debt is a healthy sign and indicates higher financial flexibility.

• Surge in Dividend payment amidst economic downturn: The company reported a significantly higher dividend payment despite the current economic jolt. Notably, the company paid a total dividend of CAD 8.145 million in Q1FY21 v/s CAD 4.031 million in Q1FY20. This indicates ample liquidity and stable cash flow generations from the operations.

• Industry beating profitability margins: The company managed to post better margins than the industry median, which is a key positive. EBITDA margin and Operating margin stood at 12.8% and 9.7%, respectively, as compared to the industry median of 12.4% and 8.7%, respectively. Moreover, the net margin stood at 7.2%, as compared to the industry median of 4.8%.

Q1FY21 Financial Highlights:

• RCH announced its quarterly result, wherein the company posted sales of CAD 581 million v/s CAD 249.401 million in Q1FY20. The increase was driven by the positive impact of acquisitions coupled with organic growth. On a geographic basis, sales from Canada grew 23.3% on y-o-y to CAD 193.240 million, while sales from the United States stood 12.6% higher at CAD 104.341 million.
• Earnings before income taxes stood at CAD 984 million, higher than CAD 16.301 million in Q1FY20. The increase was driven by higher income, partially offset by higher operating expenses (CAD 259.419 million v/s CAD 224.518 million in pcp)
• Net earnings surged to CAD 042 million, from CAD 11.794 million in Q1FY20. The increase was driven by higher earnings before income taxes, coupled with lower financial costs, net (CAD 0.657 million v/s CAD 0.733 million in Q1FY20).
• Cash and cash equivalents stood at CAD 396 million, while total assets were recorded at CAD 768.611 million.

Q1FY21 Income Statement Highlights (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 change in economic cycles could lead to a lower sale and might dampen the overall financial performance.

Valuation Methodology (Illustrative): P/E based valuation

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

Stock Recommendation:

The group offers a wide range of products of ~130,000 different items, which caters to more than 90,000 active customers and is being served by 84 centers across North America. The company has solid long-term relationships with leading suppliers, which helps the company to work effectively in a fragmented market. We have valued the stock using the price to P/E based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like CanWel Building Materials Group Ltd, Victoria PLC etc. Considering the aforesaid facts, we recommend an ‘Expensive’ rating on the stock of RCH at the last traded price of CAD 42.09 on May 25, 2021.

One-Year Price Chart (as on May 25, 2021). Analysis by Kalkine Group

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

Valorem Resources Inc.

Valorem Resources Inc. (CSE: VALU) is a Canada-based early-stage exploration company, which is engaged in the detection, acquisition, assessment, and exploration of gold, precious metals, and base metal properties.

Key Highlights:

• BCSC halted the trading in the group’s share: On May 3, 2021, British Columbia Securities Commission issued a halt trade order on the securities of Valorem until the end of May 21, 2021. In the Order, the BCSC indicates that it has become aware of unsubstantiated information about Valorem posted by a third-party online on or about April 15 and 29, 2021, and that the information includes unsupported claims about Valorem’s future share price and mining reserves for its Black Dog Lake Gold property.
• Latest Operational Update: On April 26, 2021, the company announced that it has planned a 2021 exploration and fieldwork program on the Black Dog property located in James Bay area, northern Quebec, Canada. The 2021 initial exploration work program on the Black Dog property will consist of a ground geophysical survey, surface exploration and rock sampling. Ground geophysical surveys will be conducted over the same area in order to provide new targeting information for the upcoming drilling campaign. The grid will generate 7.2 line-km of Geophysical data over a zone 800 meters long by 400 meters wide, on 50 meters spaced lines.
• Increase in net cash used in operating activities: The company reported a higher net cash out flow of CAD 1.085 million in 9MFY21 compared to CAD 0.379 million in pcp. The above was primarily due to a higher net loss of CAD 0.709 million in 9MFY21 v/s CAD 0.329 million in pcp, coupled with higher prepaid expenses (CAD 0.643 million in 9MFY21 v/s CAD 0.039 million in 9MFY20).
• Recent acquisition: On January 4, 2021, VALU announced its 100% acquisition in the Wing Shear Property. The property is consisting of 280 claim units and covers 7,000 hectares, situated 32 kilometers northeast of Gander, Newfoundland and Labrador.

Q3FY21 Financial Highlights:

• VALU announces its quarterly result, wherein the company posted loss before other item at CAD 0.368 million, higher than CAD 0.210 million in the previous corresponding period (pcp).
• The quarter witnessed higher Consulting fees (CAD 0.150 million v/s CAD 0.127 million in pcp), an increase in professional fees (CAD 0.034 million v/s CAD 0.021 million in pcp) coupled with a surge in promotion costs (CAD 0.162 million v/s CAD 0.054 million in pcp). Additionally, higher Property expenses (CAD 0.014 million v/s CAD 0.001 million in pcp) also contributed to the higher loss.
• The group reported a net loss of CAD 0.362 million, as compared to CAD 0.210 million in pcp.
• VALU reported a Cash balance of CAD 0.087 million, while total assets are recorded at CAD 1.259 million.                

Income Statement Highlights (Source: Company Report)

Risks: The company reported a higher accumulated deficit of CAD 1.893 million in Q3FY21 compared to a deficit of CAD 1.183 million in Q4FY20. Continuation of the above trend is likely to dampen the company’s financial flexibility.

Stock Recommendation:

The stock of VALU gained more than two folds in the last nine months due to increasing investors interest in the recent past backed up by recent acquisition coupled with the group’s announcement for exploration activities in FY21. The company reported a higher loss during the quarter due to a surge in input costs coupled with the absence of income generation from its operations, which has dampened the overall financial flexibility of the firm. Moreover, the company is in exploration stage and yet to start the exploration activity. Thought, the ban was supposed to end on May 21, 2021; there was no volume in the stock on May 25, 2021 trading session. In the absence of the convincing growth drivers, we prefer to remain on the sideline. Hence, considering the aforesaid facts, we recommend an ‘Avoid’ rating on the stock at the closing price of CAD 0.43 on May 25, 2021.

One-Year Price Chart (as on May 25, 2021). Analysis by Kalkine Group.

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

Disclaimer

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