Metro Inc.

Higher Sales and Gross Margin: Metro Inc. (TSX: MRU) is one of the largest grocery retailers in Canada. As on 6 July 2020, the market capitalization of the company stood at ~CAD 14.33 billion.

Quarterly Performance (For the Period Ended 14 March 2020): During the second quarter of FY20, the company reported an increase of 7.8% in sales to CAD 3,988.9 million as compared to CAD 3,701.6 million in the second quarter of fiscal 2019. The sales increase due to the COVID-19 pandemic is estimated at CAD 125 million. In the same time span, gross margin on sales was 19.7% and operating income before depreciation and amortization and associate's earnings totaled to CAD 374.1 million. Higher sales and operating income resulted in an increase in net earnings to CAD 176.2 million, resulting in diluted net earnings per share of CAD 0.69.

Quarterly Financial Highlights (Source: Company Reports)

Key Risks: The outbreak of COVID-19 resulted in the softer market conditions. With the increased restrictions and the nationwide lockdown, disposable income of the households took a hit. The lower income may further result in decreased sales of the company. However, the ease in restrictions may reduce the risk of uncertainty.

Outlook: The company is experiencing higher food revenues due to the COVID-19 pandemic but is also witnessing higher operating expenses. MRU expects delays in some investment projects, including the new automated grocery distribution centers in Ontario.

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

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

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

Stock Recommendation: The decent financial performance of the company enabled the Board to declare a quarterly dividend of CAD 0.225 per share, an increase of 12.5% over the dividend declared for the same quarter last year. As per TSX, the stock of MRU is trading slightly above the average 52-week trading levels of CAD 49 to CAD 61.75, but still holds the potential for growth. The stock of MRU gave a return of 6.1% on the YTD basis and a return of 1.26% in the past one month. We have valued the stock using the price to earnings multiple based illustrative relative valuation and have arrived at a target upside of lower single digit (in percentage terms). Considering the current trading levels, positive impact of COVID-19 on sales of the company and long-term outlook, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 56.86, up by 1.409% on 6 July 2020.

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

Dollarama Inc.

Volatile Returns and Limited Potential: Dollarama Inc. (TSX: DOL) is a Canada-based company which is principally engaged in operating discount retail stores. The company provides a broad range of everyday consumer products, general merchandise, and seasonal items, with merchandise at low fixed price points. As on 6 July 2020, the market capitalization of the company stood at CAD 14.11 billion.

Quarterly Performance (For the Period Ended 3 May 2020): During the first quarter, the company reported sales growth of 2% to CAD 844.8 million and gross margin of 41.3% of sales as compared to 42.1% of sales in the pcp. This was mainly due to negative scaling on lower sales per store, higher sales of lower margin consumable products and incremental direct costs related to COVID-19 measures implemented in the second half of the quarter. In the same time span, EBITDA decreased by 5.8% to CAD 213.7 million and operating income went down by 11.2% to CAD 149.7 million.

Quarterly Financial Highlights (Source: Company Reports)

Key Risks: The company has faced a direct and indirect impact of COVID-19. The company estimates direct costs of approximately CAD 15 million to combat the impacts of the global pandemic. Nationwide lockdown and the imposed restrictions to curb the spread of COVID-19 resulted in temporary store closures, which is further likely to impact the results of coming quarters.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The company has reported higher capital expenditure reflecting additional store-related transformational capital expenditures. As per TSX, the stock of DOL is trading slightly above the average 52-week trading range. The stock of DOL gave a return of 13.31% in the past three months but a negative return of 4.64% in the past one month. We have valued the stock using the price to cash flow multiple based illustrative relative valuation and have arrived at a downside of lower single-digit (in percentage terms). Considering the current trading levels, softer market conditions, volatility in returns and decline in quarterly performance, we suggest investors to keep an eye on the business activities. Hence, we have a watch stance on the stock at the closing market price of CAD 45.47, up by 0.1763% on 6 July 2020.

DOL Daily Technical 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.