K-Bro Linen Inc.

K-Bro Linen Inc. (TSX: KBL) is a prominent operator of laundry and linen processing facilities in Canada. The group provides a wide range of general linen and operating room linen processing, management and distribution services majorly to the healthcare institutions, hotels and other commercial accounts.  

Key Updates:

• Demand revival within the hospitality segment: Due to the recent travel ban and restriction imposed on non-essential businesses, the company reported a tepid top-line during the first half of FY20. However, during Q3FY20, with the reopening of economies and aviation, the hospitality segment witnessed a revival, and revenue from the hospitality segment stood at CAD 12.368 million, against CAD 2.417 million in Q2FY20. Moreover, the group reported improved traction from the healthcare segment as well, which stood at CAD 39.071 million, registered a growth of 11.3% on Q-O-Q basis.

Revenue Bifurcation (Source: Company Report)

• Stable Dividend Payment: The company reported a stable dividend payment in the recent past despite a doldrum in the overall operations on account of COVID-19 pandemic. Notably, the company reported stable cash flows, despite the current economic cycle, which is impressive. During 9MFY20, the company paid a total dividend of CAD 9.572 million, at par with CAD 9.522 million, a year ago.

Dividend Distribution (Source: Company Report)

• Recorded a bullish breakout: KBL Shares recently registered a bullish breakout on the daily price chart, with price crossover the crucial short-term resistance of 50-day SMA and settled above it for the three-straight day. Further, the stocks is trading above the 200-day SMA support level, implies that its shares are up for further price surge from the current price levels.

• Event Update: The group would disclose its fourth quarter FY20 result on March 18, 2021.

Q3FY20 Financial Highlights:

• KBL announced its quarterly result, wherein the company posted revenue of CAD 51.439 million, versus CAD 67.842 million in the previous corresponding period (pcp). The decline was primarily attributed to considerably lower revenue from UK Division (CAD 8.394 million versus CAD 18.351 million in pcp) and a decline income from Canadian Division (CAD 43.045 million versus CAD 49.491 million in pcp).
• The group reported a lower expense of CAD 38.720 million, as compared to CAD 53.225 million, due to significantly lower wages and benefits (CAD 16.963 million versus CAD 26.605 million in pcp) and a decline in utility cost (CAD 2.849 million versus CAD 4.105 million in pcp) and delivery expenses (CAD 5.128 million versus CAD 7.107 million in pcp).
• EBITDA was reported at CAD 12.719 million, lower than CAD 14.617 million in pcp.
• The group reported net earnings of CAD 3.442 million versus CAD 4.669 million in pcp, partially supported by a lower finance expense (CAD 1.141 million versus CAD 1.510 million in pcp).
• The company reported cash and cash equivalents of CAD 0.998 million, while total assets were recorded at CAD 338.591 million.

Q3FY20 Income Statement Highlights (Source: Company Report)

Risks: Extension of travel restrictions due to the second wave of the virus would dampen the performance of the hospitality sector, which would have a negative impact on the company’s operations.

Valuation Methodology (Illustrative): Price to Earnings 

Note: All forecasted figures and peers have been taken from Refinitiv (Thomson Reuter)

Stock Recommendation:

The company has lowered the long-term debt to CAD 59.325 million in Q3FY21, from CAD 62.494 million in FY19, which suggests a lower finance expense in the coming quarters. The company has a strong business model, and its healthcare segment is expected to remain positive on a medium to long-term basis. Moreover, the management expects the consolidated adjusted EBITDA margin before the adoption of IFRS 16 to remain within the range of 12% to 16% for FY20. On the flipside, a further travel ban would take a toll on the hospitality segment of the company. The stock of KBL appreciated ~25% and ~32% in the last six months and nine months, respectively, due to a strong revival within the hospitality segment during Q3FY20. We have valued the stock using the P/E based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, peers like Savaria Corp, Park Lawn Corp etc. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 39.09 on March 03, 2021.

1-Year Price Chart (as on March 03, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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