Clearwater Seafoods Incorporated

Clearwater Seafoods Incorporated (TSX: CLR) is one of the leading vertically integrated harvester, processor and distributor of premium seafood. The Group operates in wild-caught shellfish with harvesting operations in Canada, Argentina and the UK.

Q2FY20 Financial Highlights: Clearwater Seafoods declared its quarterly results, wherein the Company posted sales of CAD 105.968 million, as compared to CAD 153.874 million in the previous corresponding (pcp). The decline was majorly attributable to the recent closure of the restaurant and food industry, which was partially offset by consumer demand from the traditional retail and online demand. Gross margin stood significantly lower at CAD 18.398 million from CAD 31.587 million in the previous corresponding quarter, due to decline in the top-line, partially offset by a slide in the cost of goods sold. Earnings before income taxes improved to CAD 12.029 million, from CAD 11.843 million, a year ago, majorly attributable to a handsome gain from derivative financial instruments coupled with lower administrative and selling costs, net finance costs and a higher other income. The Company reported an improved bottom-line at CAD 12.780 million, as compared to CAD 11.339 million in Q2FY19. The Company reported a cash balance of CAD 20.664 million, while total assets stood at CAD 714.296 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Company might face challenges within the traditional retail segment if the COVID-19 restrictions extended or reintroduced. Further, a second wave of the novel virus might interrupt the supply chain.

Valuation Methodology: EV to Sales Based (Illustrative)

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

Stock Recommendation: Amidst the current shock in the equity market, the stock stood resilient in the recent past and delivered an impressive return ~8% and ~15% in the last six months and nine months, respectively. Investors should note that the stock is trading above the 200-days simple moving average of CAD 5.30, indicating a bullish-pattern. Clearwater is recognized for its high quality, variety, and reliable delivery of premium, wild and exotic seafood and has a decent market presence, which is noteworthy. However, the current glitch in the economy owing to lower consumer demand and strict measures across the hospitality and retail sectors took a toll on the demand and subsequently, on its sales volume. Meanwhile, we expect demand to improve during the second half of FY20, as governments across the geographies are easing the containment measures and allowing business (restaurants and others) to resume operations. Furthermore, the Group is focusing on expanding its footprints across international markets through innovative products coupled with higher promotional activities through retail and e-commerce. We have valued the stock using the EV to Sales based relative valuation approach and arrived at a target price, which suggests a single-digit upside potential (in % terms). For the said purpose, we have considered the industry median (Food & Tobacco) for the purpose. Hence, considering the aforesaid facts, reopening of food services, current price movement and improved consumer demand, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 5.85 on August 12, 2020.

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

AirBoss of America Corp

AirBoss of America Corp (TSX: BOS) is a Chemicals Company based out of Canada. The Group is engaged in the business of manufacturing products based on the rubber for industrial, automotive, resource and military markets. The Company’s operations are divided into three reportable segments being AirBoss Defense Group, Engineered Products and Rubber Solutions.

Recent News

On 27 July 2020, AirBoss of America Corp announced that its ADG (AirBoss Defense Group) won a contract from HHS (U.S. Department for Health and Human Services). The contract is expected to be around USD 121 million.

Financial Highlights – Q2 and H1 Financial Year 2020 (30 June 2020, USD, thousand)

(Source: Quarterly Report, Company Website)

In the first half of the financial year 2020, driven by higher sales from defense business for the period, the net sales increased to $206,647 thousand (H1 FY2019: $165,191 thousand), while the net sales in Q2 FY2020 surged to $112,450 thousand (Q2 FY2019: $82,616 thousand). Reflecting the higher revenue mix, the adjusted EBITDA stood at $35,393 thousand in H1 FY2020 (H1 FY2019: $16,763 thousand), while the adjusted EBITDA increased significantly in Q2 FY2020 to $25,665 thousand (Q2 FY2019: $8,252 thousand). The net income for the H1 FY2020 stood at $15,170 thousand (H1 FY2019: $6,237 thousand) and net income in Q2 FY2020 stood at $14,383 thousand (Q2 FY2019: $3,311 thousand), reflecting higher revenue and EBITDA. The adjusted basic and diluted earnings per share stood at 0.26 cents in H1 FY2020 (H1 FY2019: 0.27 cents), with a declared dividend of CAD$ 0.14 for the period. The total assets as at 30 June 2020 stood at $320,232 thousand (31^st December 2019: $249,664 thousand).

Share Price Performance

BOS 1 Year Technical Chart, Source: Refinitiv, Thomson Reuters

AirBoss of America Corp shares closed at CAD 22.40 at the time of writing after the market close on 12 August 2020. Stock's 52 weeks High is CAD 26.67 and Low is CAD 4.59.

Key Risks

The demand for rubber products has declined due to the outbreak of covid-19 pandemic, which resulted in lower financial performance. The overall business of the Company could be affected by a change in regulations and government policies.

Conclusion

The Company has shown an improvement in financial performance in the first half of the financial year 2020 and Q2 FY2020. Both the revenue and bottom-line performance have increased. The revenue from core operations has improved, while the cash balance has increased significantly. The Group needs to manage its operating expenses unless it results in further deterioration in financial performance in the coming years. The demand for rubber products under its core business has declined due to the impact of covid-19. The Group is looking to reposition Rubber Solutions segment to achieve a defensive leadership position in the North American market. The Group is looking to capitalize on enhanced capabilities and scale of ADG to pursue value-creation and growth opportunities. Presently, the company is trading near a 52-week high, raising doubts at its upside potential at current prices.

Based on the factors as highlighted above, we recommend investors to keep a “Watch” on the stock at the closing price of CAD 22.40 (as on 12 August 2020), with support from few catalysts needs to be evaluated at a later stage.

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.