SmartCentres Real Estate Investment Trust

SmartCentres Real Estate Investment Trust (TSX: SRU.UN) is a Canada based real-estate company, which engages in development, leasing and property development of shopping centres, residential rental buildings, retirement homes, office buildings and self-storage facilities.

Q1FY20 Financial Highlights: For the quarter ended March 31, 2020, SRU.UN posted a flat top line of CAD 206.73 million, as compared to CAD 206.43 million in the previous corresponding period. Property operating costs increased marginally to CAD 82.90 million, from CAD 82.42 million in pcp. Net income and comprehensive income decline to CAD 64.20 million, from CAD 79.97 million in Q1FY19, primarily due to a significant loss (CCAD 63.8 million) from fair value adjustment on revaluation of investment properties.  However, a decline in general and administrative (G&A) expense, higher earnings from equity-accounted investments and a gain from fair value adjustment on financial instruments supported the bottom line. The Company reported higher funds from operations at CAD 96 million, increased 8.7% on y-o-y basis primarily due to incremental revenue associated with the expansion of the Toronto Premiums Outlets, lower G&A expenses followed by an additional income from PwC-YMCA Tower. Funds from Operations (FFO) per Unit stood at CAD 0.56, increased CAD 0.04 than the previous corresponding period. The Group reported an occupancy rate of 97.8% as of March 31, 2020.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology (Illustrative):  Price/Earnings based Relative Valuation

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

Stock Recommendation: The stock witnessed selling pressure in the recent past due to the fear of higher arrears rate in coming quarters. However, a significant portion (~60%) of the rental revenue derives from retail tenants who are offering ‘essential services’ and are opened fully or partially, ensuring stable cash flows for the business. Furthermore, the Company has an esteemed clientele list such as Walmart, Loblaws, Shoppers Drug Mart, Canadian Tire, Sobeys, Metro, Dollarama, Rexall, Home Depot, McDonald’s etc., which offers a strong margin of safety and least chances of bad debt due to their strong business model. The Group identified that ~6% of its revenue comes from small independent retailers and expects short term challenges and a spike in arrears. The Group seems to have decent liquidity of CAD 439.5 million (cash on hand) and CAD 250 million of undrawn credit facility which would ensure smooth flow of business during the ongoing pandemic. In addition to these, the Group anticipates a temporary glitch on the ongoing construction and delay in the project completion. We have valued the stock using Price/Earnings based relative valuation approach. We have taken peers like First Capital Realty Inc (TSX: FCR.UN), RioCan Real Estate Investment Trust (TSX: REI.UN) and CT Real Estate Investment Trust (TSX: CRT.UN) etc., and arrived at a target price offering double-digit upside potential (in % terms).  Hence, we recommend a ‘Buy’ rating on the stock at the current price of CAD 18.50 as on May 14, 2020.

SRU.UN One-Year Daily Price Chart, Source: Refinitiv (Thomson Reuters)

Finning International Inc.

Finning International Inc. (TSX: FTT) is a leading dealer and distributor of heavy-duty machinery and parts under the brand called Caterpillar. The Group sells and rents Caterpillar machinery primarily to the mining, construction, petroleum, forestry, and power system application industries.

The Board of Directors has declared a quarterly dividend of CAD 0.205 per common share, payable on June 4, 2020.

Q1FY19 Financial Highlights: FTT declared its quarterly results, wherein the Company reported total revenue of CAD 1,558 million, stood lower than CAD 1,810 million recorded in Q1FY19. The decline was primarily attributable to a significant decline within the new equipment space and used equipment augment. However, revenue from product support and Fuel & Fuel & another segment grew on an annual basis. Gross profit stood marginally lower at CAD 418 million, as compared to CAD 430 million, on account of a considerable fall in the cost of sales. The group reported its net income at CAD 54 million, higher than CAD 28 million recorded in 1QFY19. The Company exited the quarter with cash and cash equivalent of CAD 260 million while total assets stood at CAD 6,255 million during the end of Q1FY20.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock witnessed huge selling pressure in the recent past and corrected ~30% and ~24% in the last six-months and one-year, respectively. The Group reported a lower revenue due to challenging market condition across Western Canada primarily due to declining capital expenditure by its clients, and reduced construction activities. However, Finning International managed to report an improved bottom-line through strict maintenance of its input costs. In order to enhance its liquidity, the company secured a CAD 500 million from revolving credit facility, which is expected to support the working capital requirement. However, on a macro perspective, due to the ongoing COVID 19 pandemic, most of the oil manufacturers have witnessed pressure on their cash flow due to the lower price realization from crude oil. These companies have cut their FY20 capital expenditures which have resulted in a plunge in demand for the company’s New Equipment segment. Further, FTT witnessed a lower demand from mining players due to ongoing shut down at various mining plants. The management expects the material impact of COVID-19 in the second quarter. We expect, the current downturn to persist in coming quarters and the demand to take a hit till the situation recovers. Considering the aforesaid factors, we prefer to remain on the sidelines. Further, the stock is available at a price to earnings multiples of 10.7x on TTM basis a significantly higher than the industry (Industrials) average of 6.2x. Hence, we recommend a ‘Watch’ stance on the stock at the current market price of CAD 16.77, as on May 14, 2020.

FTT One-Year Daily Price Chart, Source: Refinitiv (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.