Lower Volumes and Pricing Keep Us at Bay: Hudbay Minerals Inc. (TSX: HBM) is a low-cost, diversified metal mining company which primarily produces copper concentrate (including copper, gold, and silver) and zinc. The company owns four ore concentrators, three polymetallic mines, and a zinc production facility. Hudbay Minerals is scheduled to announce its first quarter financial result on May 14.

Hudbay Minerals posted revenues of US$ 324.49 million in 2019. The reported revenues reflect a y-o-y decline of 8% owing to decline in sales volume and prices of metals primarily copper and zinc. Notably, realized prices for copper and zinc fell by 7% and 11%, respectively in 2019. However, realized prices for gold increased by 6%. Total cost of sales came in at US$ 298.9 million, reflecting an increase of 8% y-o-y. The higher cost of sales was due to an increase in mining costs, inventory, and depreciation in Peru. Meanwhile, in Manitoba, cost of sales rose by US$ 12.5 million y-o-y due to the higher mining costs, depreciation, and G&A expenses. A decline in admin costs and lower stock compensation expenses drove y-o-y improvement in the selling and administrative expenses. However, net finance expense increased y-o-y to US$ 42.6 million, as compared to US$ 38.4 million. The company reported loss of US$ 1.5 million, which reflects a sharp improvement from the prior year.  

Cash generated from operating activities stood at US$ 98.7 million, down US$ 38.7 million when compared to the prior year. As on December 31, cash & cash equivalents stood at US$ 396.15 million.  Long-term debt stood at US$ 985.26 million, while net debt came in at US$ 589.11 million.

Financial Highlights (Source: Company Reports)

Stock Recommendation: HBM stock has corrected more than 37.7% so far this year, which makes it attractive on the valuation front. However, we prefer to remain on sidelines as an expected decline in volumes and lower price realization is likely to hurt the company’s EBITDA and cash flows. Earlier, the company stated the consolidated production of copper contained in concentrate is likely to decline by 22% y-o-y due to the lower copper grades at Constancia . However, zinc contained in concentrate is likely to increase. We believe the lower production guidance coupled with disruption from COVID-19 is likely to weigh on volumes. A decline in sales volume and realized prices of metals primarily copper and zinc are expected to hurt the company’s financials. Given the near-term weakness and pressure on financials, we recommend a ‘Watch’ on HBM stock at the closing price of CAD 3.38, up 5.63% on April 24.

HBM Daily Price Chart (Source: Thomson Reuters)

Richelieu Hardware Ltd 

Upside seems to be capped on account of near-term headwind: Richelieu Hardware Ltd (TSX: RCH) involved in importing, manufacturing, and distributing specialty hardware and complementary products. The company offers products which are used in home and office furnishing such as storage and closet, kitchen and bathroom cabinet, door and window, residential and commercial woodworkers etc.

In order to mitigate the financial impact from COVID 19 and protect cash, the company cancelled its dividend distribution program for Q1FY20, which would support its cash flow. Further, the company announced reduction in remuneration for board and management team, followed by a revision in the salaries for its staffs and made temporary layoffs in order to enhance liquidity.

Q1FY20 Financial Highlights: RCH came up with an impressive set of numbers, wherein its posted sales of CAD 249.40 million, as compared to CAD 226.35 million in Q1FY20.The increase was supported by additional income from its three acquisitions in North America coupled with strength in the base business. Operating income stood higher at CAD 17.03 million, improved from CAD 14.19 million in the previous corresponding period, thanks to the revenue growth. The company reported net income of CAD 11.79 million, which witnessed a decent growth from CAD 9.93 million in the previous corresponding quarter. The company made capital investments amounting to CAD 26.51 million, higher than Q1FY19. The company exited the quarter with total assets amounting to CAD 696.01 million as on February 29, 2020.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock has generated a stellar return of ~20% in the last one year. For FY19, the company reported improved EBITDA margin (10% vs 9.2% in Q1FY19) backed up by higher sales and cost-saving measures. The company serves more than 90,000 customers through a retail presence across 82 locations in North America. Due to the outbreak of COVID 19, we expect demand to slowdown in the short-term and company’s sales and profitability to take a hit. However, the company has a healthy balance sheet, ample liquidity and a good product presence across North America. However, the stock has shown sharp recovery in the recent past and trading at a high valuation multiple. For instance, RCH stock is trading at a forward P/E multiple of 28.1x, which is higher than the peer group average of 13.4x. Further, RCH stock is trading at a forward EV/EBITDA multiple of 14.6x, as compared to the peer group average of 9.8x. Notably, RCH stock has historically traded at a premium as compared to the industry average. However, given the near-term headwinds and the company’s high valuation, we would like to wait for a better entry point as positives are already priced in the stock. We recommend a ‘Watch’ on RCH stock at the closing market price of CAD 25.77 as on April 24, 2020.

RCH Daily Price Chart (Source: Thomson Reuters)

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