Empire Company Limited

Empire Company Limited (TSX: EMP.A) is a Canadian company engaged in food retailing and related real estate. The company's segments include Food Retailing, and Investments and Other Operations.

Key Highlights 

• Aiming Higher Numbers: Project Horizon, a three-year growth plan centered on core business expansion and e-commerce acceleration, was recently unveiled. By FY23, EMP.A expects to generate an additional CAD 500 million in annualized EBITDA and a 100-basis point increase in EBITDA margin by increasing market share and improving cost and margin discipline.

• Introduction of Online Grocery Home Delivery: The company launched its online grocery home delivery segment through its newest e-commerce platform, Voilà. The above would provide delivery service across more than thirty stores in Nova Scotia, New Brunswick, Newfoundland and Labrador, Prince Edward Island, and Alberta. Due to the growing traction towards the homedelivery segment, we believe the above addition will likely boost the company's upcoming sales volumes.

• Growth in Cash Flows Amidst Turbulent Times: The group reported higher cash from operations of CAD 424.6 million in the reported period, higher than CAD 399.4 million in pcp. It also clocked a free cash flow of CAD 115.5 million in Q1FY22 (ended July 31, 2021). An increase in cash flows is likely to boost the company's liquidity.

• Industry Beating Margins: The management's solid determination and business resilience has helped them beat the industry margins on many fronts in Q1FY22, which indicates improved operational efficiency. The chart below gives a glimpse of this.

Source: REFINITIV, Analysis by Kalkine 

Financial Overview of Q1FY22

Source: Company 

• The company announced its quarterly result, wherein it posted sales of CAD 7,626 million, an improvement from CAD 7,354.2 million in the previous corresponding period. The increase in sales was due to the acquisition of Longo's, combined with an increase in fuel sales due to higher fuel prices and consumption.

• Operating income stood at CAD 347.4 million, a slide from CAD 377.6 million in pcp. The decrease was due to a higher cost of sales (CAD 5,713.8 million v/s CAD 5,505.6 million in pcp) coupled with marginally higher selling and administrative expenses.
• The group reported its net earnings of CAD 211.9 million, slightly lower than CAD 216.8 million in pcp. The quarter witnessed slightly lower net finance costs, along with a lower income tax expense.

Risks Associated with Investment

The company's products are subject to seasonality and fluctuations in inflation. Moreover, a change in consumer preference might lead to a decline in the overall market share. 

Valuation Methodology (Illustrative): Price to Earnings based 

Stock Recommendation 

The group is focused on its growth plan for core business expansion and the acceleration of e-commerce. As a result, it is on track to achieve a targeted incremental CAD 500 million in annualized EBITDA and a 100 bps improvement in EBITDA margin by FY23, which is a key positive. Furthermore, the company announced the following two locations to expand its FreshCo discount banner in Western Canada, both of which are expected to open in H1FY23. We believe this would help the company in growing its market share. Hence, considering the aforesaid facts, we recommend a 'Hold' rating on the stock at the last traded price of CAD 37.22 on November 26, 2021.

One-Year Technical Price Chart (as on November 26, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV. 

Conifex Timber Inc.

Conifex Timber Inc. (TSX: CFF) is a Canada based forestry company that operates through two segments, i.e., Lumber and Bioenergy. The primary activities of the lumber segment include timber harvesting, reforestation, forest management, sawmilling logs into lumber and wood chips, and value-added lumber finishing.

Key Updates

• Cash Flow Turned Positive: For 9MFY21 (ended September 30, 2021), the company reported its cash from operations of CAD 30.642 million, compared to CAD 15.440 million of cash used in pcp. A positive cash flow indicates higher liquidity and is a key positive. Notably, the company reported available liquidity of CAD 33.4 million in Q3FY21, higher than CAD 6.4 million in pcp.

• Bullish Industry Outlook: The lumber market is expected to remain strong, supported by steady demand from the US housing segment coupled with solid momentum from the repair & remodelling sector. CFF also intends to operate at ~88% of its total capacity in Q4FY21, higher than 67% in Q3FY21. Moreover, for Q4FY21, the company expects an increase in the lumber shipments on a q-o-q basis, another key positive.

• Strong Momentum from the Lumber (Wholesale) Segment: CFF reported higher income from its Lumber (wholesale) segment, which grew to CAD 22.1 million in 9MFY21, higher than CAD 1.7 million in pcp. The above was primarily driven by higher shipments of 12.5 MMfbm in 9MFY21 than 2.3 MMfbm in pcp.

Q3FY21 Financial Highlights

• CFF announced its quarterly result, wherein the company posted higher revenues of CAD 552 million compared to CAD 37.593 million in Q3FY20. The increase was aided by solid growth from the Lumber-wholesale segment (CAD 12.5 million v/s CAD 0.5 million in pcp). 
• Total costs stood at CAD 290 million, higher than CAD 30.614 million in pcp. The increase was driven by higher cost of goods sold and higher selling, general & administrative expenses. As a result, the group reported an operating loss of CAD 0.738 million compared to an operating income of CAD 6.979 million in pcp.
• Its net loss for Q3FY21 amounted to CAD 0.851 million compared to a net profit of CAD 2.008 million in pcp. The quarter witnessed lower finance costs and accretion and a higher foreign exchange gain.

Q3FY21 Income Statement Highlights (Source: Company Reports)

Risks Associated with Investment 

The majority of the company's revenue is derived from the lumber segment. Therefore, a correction in the lumber prices would lead to lower realization, further hindering the company's cash flows and margins. 

Valuation Methodology (illustrative): Price to Earnings based

Stock Recommendation

At the end of Q3FY21, the company reported its cash balance and restricted cash of CAD 23.418 million and CAD 6.554 million, respectively, which is an improvement from CAD 11.150 million and CAD 3.627 million in FY20. A higher cash balance is a key positive for the company.

We have valued the stock using the Price to Earnings-based relative valuation method and have arrived at a single-digit upside (in percentage terms). We have considered peers like Supremex Inc, West Fraser Timber Co Ltd, etc. Considering the aforesaid facts, we recommend a 'Hold' rating on the stock of CFF at the last trading price of CAD 1.99 on November 26, 2021. 

One-Year Technical Price Chart (as on November 26, 2021). Source: REFINITIV, Analysis by Kalkine Group  

*The reference data in this report has been partly sourced from REFINITIV.

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.