Morguard Corporation

Morguard Corporation (TSX: MRC) is a real estate company which owns, acquires and develops properties across Canada and the United States.

Q2FY20 Financial Highlights: MRC announced its quarterly results, wherein the Company posted total revenue of CAD 240.905 million as compared to CAD 300.247 million in the previous corresponding period (pcp). The decline was primarily due to 86.5% y-o-y decline in hotel properties revenue to CAD 8.8 million on account of hotel closures and reduced occupancies. During the quarter, net operating income took a hit and fell 12.6% y-o-y basis to CAD131.2 million, primarily attributable to a lower NOI from the hotel portfolio and higher bad debt expense. Net loss stood at CAD 105.0 million as compared to a net income of CAD 69.3 million, a year ago primarily due to a decrease in net fair value gain amounting to CAD 183.8 million. Normalized FFO decreased by 29.5% y-o-y basis to CAD 41.7 million, against CAD 59.1 million in pcp.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: Prolong closure of hotels, and restaurant segments would increase the arrear for the company, which might result in lower performance. Also, the increasing unemployment rate might result in a delay in rent collection, which could hamper the cash flow.  

Valuation Methodology (Illustrative): EV/EBITDA based Relative Valuation

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

Stock Recommendation: The stock of MRC tumbled in the recent past and corrected ~40% and 31% in the last six months and one year. Within the residential segment, the company collected 95.3% of the rent, which is in-line with the historical trend. Rent collection and occupancy stood stable across Canada and the U.S. region, which is encouraging. In the Retail segment, all of the company's enclosed malls are now open, and the vast majority of tenants are allowed to operate, which is a key positive. The performance of the hotel segment was marred by the COVID-19 pandemic; however, it represents less than 10% of total NOI and less than 5% of the total company’s assets. The company has liquidity of approximately CAD 469 million, which comprised of CAD 136 million in cash and CAD 333 million available under its revolving credit facilities. In addition, the company has approximately CAD 865 million of unencumbered income-producing and hotel properties which could be financed. To further enhance liquidity, the company has narrowed down the scope of its capital expenditure program to ensure the availability of resources. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered Boardwalk Real Estate Investment Trust (TSX: BEI.UN), Northview Apartment REIT (TSX: NVU.UN), and Killam Apartment REIT (TSX: KMP) etc., as a peer group. Hence, considering the aforesaid facts, current price movement, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 121.81 on August 7, 2020.

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

Primo Water Corp

Primo Water Corporation (TSX: PRMW) is a beverages company based out of Canada and providing water solutions. The Group, along with its subsidiaries such as Aimia Foods, Eden Springs and DS Services, offers bottled water with office and home delivery. Primo also sells self-service refill drinking water, purified bottled water and water dispensers in Canada and the USA.

Financial Highlights – Q2 & H1 Financial Year 2020 (27 June 2020, USD, million)

(Source: Quarterly Report, Company Website) 

In the first half of the financial year 2020, the net revenue increased to USD 931 million (H1 FY2019: USD 883.3 million), led by an increase in the revenue from the US operations. The net revenue in Q2 FY2020 stood at USD 456.8 million (Q2 FY2019: USD 455.6 million). Due to an increase in the operating expenses for the period, the Group reported an operating loss of USD 118 million in the H1 FY2020 (H1 FY2019: operating profit of USD 22.2 million), and operating loss in Q2 FY2020 stood at USD 114 million (Q2 FY2019: operating profit of USD 21.5 million). The LBT (loss before tax) from continuing operations stood at USD 163.8 million in H1 FY2020 (H1 FY2019: LBT of USD 19.2 million). The Group reported a net loss (continuing and discontinued operations) of USD 132.5 million in H1 FY2020 versus a net loss (continuing and discontinued operations) of USD 15.3 million in H1 FY2019. The basic and diluted loss per share (continuing and discontinued operations) stood at $0.88 in H1 FY2020 (H1 FY2019: basic and diluted loss per share of $0.11).

Share Price Performance

Primo Water Corp shares closed at CAD 19.14 at the time of writing after the market close on 7 August 2020. Stock's 52 weeks High is CAD 21.24 and Low is CAD 9.23.

Key Risks

Due to the outbreak of covid-19 and imposed lockdown to contain the spread of the virus, the Company’s financial performance was impacted. The business of the Company is affected by a change in government policies  and regulations.

Conclusion

The Group has shown a decline in financial performance in the first half and the second quarter of the financial year 2020. The top-line performance has improved, while the bottom-line performance has declined, and profitability margins remained in the negative zone for the period. The Company has witnessed growth in revenue from the US operations, while the revenue declined from other operations. The Group needs to manage its operating expenses unless it results in further deterioration in financial performance in the coming years. The Group’s cash balance has increased and generated higher cash flow from operations. The Group’s operational performance, cash flows, financial condition and business operations were significantly impacted by the covid-19 mayhem. Due to the outbreak of Covid-19, the Group will pause all development and acquisition activities and will take measures to preserve cash and reduce costs. The Company stays focused on building the long-term health of the brands, a culture of everyday efficiency, and supported by data-led insights.

Based on the above rationale, we have given a “Hold” recommendation at the closing price of CAD 19.14 (as on 7 August 2020).

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.