Empire Co Ltd.

Empire Co Ltd. (TSX: EMP.A) operates in food retailing, investments, and other operations. The food retailing division operates through Empire's subsidiary Sobeys and represents nearly all of the company's income.

Key Updates:

• Higher Margins: The company commands higher margins than its peers, which indicates improved operational efficiency. EBITDA margin and operating margin of 7.3% and 4.6%, respectively, in Q1FY22, higher than the industry median of 5.5% and 3.8%, respectively. Pretax margin and net margin stood at 3.7% and 2.8%, respectively, higher than the industry median of 3.2% and 2.0%, respectively.

• Introduction of online grocery home delivery: The company launched its online grocery home delivery segment through the company’s newest e-commerce platform, Voilà. The above would provide delivery service across more than thirty store locations in Nova Scotia, New Brunswick, Newfoundland and Labrador, Prince Edward Island, and Alberta. We believe, due to the growing traction towards the homedelivery segment, the above addition is likely to 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 H1FY21, higher than CAD 399.4 million in pcp. An increase in cash flows is likely to boost the company’s liquidity.

Q1FY22 Financial Highlights:     

• EMP.A announces its quarterly result, wherein the company posted sales of CAD 7,626 million, improved from CAD 7,354.2 million in the previous corresponding period (pcp). The increase in sales was due to the acquisition of Longo’s combined with an increase in fuel sales as a result of higher fuel prices and consumption.

• Operating income stood at CAD 347.4 million, 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 reported slightly lower net finance costs while a lower income tax expense.  

Q1FY22 Income Statement Highlights (Source: Company Report)

Risks: The company’s products are subjected 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 company reported higher dividend distribution of CAD 39.9 million in H1FY21, which is higher than CAD 35.0 million in pcp, backed by stable cash flow generation. The management expects improved consumer sentiment in the coming days, supported by increased economic activity due to reduction in travel restrictions. The above is expected to support the company’s sales volumes in the foreseeable future. We have valued the stock using the price to price to earnings-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Empire Company Ltd, Alimentation Couche-Tard Inc and George Weston Ltd. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of EMP.A at the last traded price of CAD 37.00 on October 29, 2021.

One-Year Technical Price Chart (as on October 29, 2021). Analysis by Kalkine Group

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

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