Ritchie Bros. Auctioneers Inc

Ritchie Bros. Auctioneers Incorporated (TSX: RBA) operates a leading marketplace for heavy equipment. The company operates across 40 live auction sites in 13 countries, along with online marketplaces, including IronPlanet, Marketplace-E, and Govplanet. In 2019, the company held 337 auctions, selling over USD 5 billion worth of equipment.

The company announced the appointment of Kevin Geisner as Chief Strategy Officer (CSO) on August 10, 2020. The company announced a quarterly cash dividend of USD 0.22 per common share, payable on September 16, 2020.

Q2FY20 Financial Highlights: RBA declared its second quarter results wherein the company posted a stable set of numbers. Revenue stood at USD 389.050 million, reflecting a decline of 1% on y-o-y basis due to a slight decline from both the segments. Cost of services declined by 22% at USD 39.448 million, while the cost of inventory sold declined by 4% on y-o-y basis to USD 143.134 million. The decline was mainly attributable to significant reductions in costs related to employee compensation and travel, advertising, and promotion expenses. The cost of inventory sold decreased at a higher rate than the decrease of inventory sales revenue, indicating an improvement in the revenue margin. The company reported a surge in selling, general and administrative expense during the quarter primarily due to higher incentive expense. The Company’s GTV stood flat at USD 1.5 billion, as compared to Q2FY19. The company reported operating income margin at 22.8% as compared to 19.8% in the previous corresponding quarter. Net income, during the quarter, stood at USD 53.043 million, reflecting a decline of 2% due to an increase in the effective tax rate, partially offset by a higher operating income and lower interest expense.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: On account of COVID-19 virus and the social distancing restrictions, the Company cancelled few live auctions in the recent past, and prolonged measures might lead to further cancellation of such events. Any such scenario would hamper financial performance.

Stock Recommendation: The stock of RBA stood resilient in the recent past and soared ~36% and 57% in the last six months and one year, respectively. Amidst the current economic cycle, wherein most of the sectors are witnessing a decline in the sales due to weak consumer sentiment, RBA has reported a stable set of numbers and has retained its overall performance, which is commendable. The auction market remained resilient in the recent past and is expected to remain robust in the coming days, which is a key positive. Investors should note that the stock has closed above its 200-days simple moving average (SMA) of CAD 55.98, indicating a bullish pattern. The stock has closed near its 52-weeks trading range of CAD 77.92 and CAD 37.76. Hence, considering the recent price movement, trading range, resilient performance and a strong outlook of the auction market, we recommend a ‘Hold’ rating on the stock at the current closing price of CAD 77.60, up 2.96% on August 10, 2020.

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

West Fraser Timber Co Ltd

West Fraser Timber Co Ltd (TSX: WFT) is a Forestry & Paper company offering diversified wood products and produces wood chips, newsprint, lumber SPF (spruce-pine-fir) & SYP (southern yellow pine), panels and pulp. The Company has divided its operations into 4 reportable segments being Pulp & Paper, Panels, Lumber and Corporate and other. WFT carries its operations through joint operations and subsidiaries in Alberta, British Columbia and southern part of US.

Financial Highlights – Q2 and H1 Financial Year 2020 (30 June 2020, CAD, million)

(Source: Quarterly Report Company Website) 

In the first half of the financial year 2020, due to a decline in sales from Pulp & Paper and Panels businesses, total sales dipped to CAD 2,471 million (H1 FY2019: CAD 2,558 million) and revenue in Q2 FY2020 declined to CAD 1,276 million (Q2 FY2019: CAD 1,317 million). The adjusted EBITDA stood at CAD 311 million in H1 FY2020 (H1 FY2019: CAD 166 million), reflecting improved prices, lower fibre costs and favourable foreign exchange movements. The adjusted EBITDA stood at CAD 184 million in Q2 FY2020 (Q2 FY2019: CAD 56 million). The operating earnings in H1 FY2020 stood at CAD 96 million (H1 FY2019: operating loss of CAD 74 million), reflecting improved adjusted EBITDA. The earnings stood at CAD 60 million in H1 FY2020 (H1 FY2019: loss of CAD 63 million), and the earnings for Q2 FY2020 stood at CAD 48 million (Q2 FY2019: loss of CAD 58 million). The basic earnings per share stood at $0.88 in H1 FY2020 (H1 FY2019: basic loss per share of $0.92) and adjusted basic earnings per share of $1.55 in H1 FY2020 (H1 FY2019: $0.08).

Share Price Performance

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

West Fraser Timber Co Ltd shares closed at CAD 67.91 at the time of writing after the market close on 10 August 2020. Stock's 52 weeks High is CAD 67.91 and Low is CAD 21.60.

Key Risks

The market conditions in which the company operates is full of challenges and might impact the operation performance and reduce financial performance as well. The Company’s overall business could be impacted due to changes in government policies  and regulations.

Conclusion

In the first half of the financial year 2020 and Q2 FY2020, the Company has shown an increase in financial performance. The top-line performance has declined, while the bottom-line performance has improved for the period. The Group’s revenue from Panels division and Pulp & Paper division have declined for the period. WFT is expecting disruptions in supply chain and a decline in market demand due to the outbreak of the covid-19 pandemic. The Group is operating at a lower capacity and expects its production to be variable depending upon the foreseeable future. The Group has withdrawn its production guidance for the financial year 2020 and will review the position to take actions to reduce costs and preserve cash. Presently, the company is trading near its 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 67.91 (as on 10 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.