Stable Business with Sustained Demand for Food and Drug: Loblaw Companies Limited (TSX: L) is Canada’s biggest retailers. With more than 1,050 grocery stores, the company is also a leading food retailer. Besides, Loblaw also sells general merchandise under different banners. Also, Loblaw operates full-service pharmacies.

On April 30, 2020, Loblaw issued senior unsecured notes of CAD 350 million. The company is likely to use the proceeds from issue to repay its medium-term notes, maturing on June 18, 2020.  The Group declared a dividend of CAD 0.315 per share, payable on July 1, 2020.

Q1FY20 Financial Highlights: Loblaw reported strong financial results for the first quarter of 2020. Spike in demand from COVID-19 outbreak drove the company’s financials. During the first quarter, the company posted revenues of CAD 11.80 million, up 10.7% y-o-y reflecting double digit growth from food and drug retail. Operating income soared 20% on y-o-y basis to CAD 541 million. The Group reported a higher adjusted EBITDA of CAD 1,169 million, up 12.4% on y-o-y basis, followed by a 10-bps improvement in adjusted EBITDA margin of 9.9%. During the quarter, Loblaw reported capital expenditure of CAD 211 million while posted a free cash flow CAD 1,186 million. Net earnings attributable to shareholders of the company stood higher at CAD 243 million, as compared to CAD 201 million in the previous corresponding quarter. As at March 21, total debt including total lease liabilities stood at CAD 14.342 billion.

1FY20 Financial Highlights (Source: Company Reports)

Valuation Methodology (Illustrative): Price/Earnings based Approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Loblaw’s defensive business model and sustained demand for its products makes it an ideal investment choice amid high volatility. Besides, the company’s business is likely to remain resilient to the economic cycles as it operates a wide spectrum of value and specialty stores. The company’s stock has been resilient to the recent stock market carnage and is up about 2.2% on the year-to-date basis. Moreover, it is up ~6% in the last one year. While we expect the demand to sustain, the pace of growth could decelerate a bit from the first quarter. To cater the growing online demand, the company has expanded PC Express e-commerce services and has eliminated fees and is reducing prices associated with these online services, which is expected to support the cash flows in coming months. We have valued the stock using Price to Earnings based relative valuation and considered Metro Inc (TSX: MRU), Alimentation Couche-Tard Inc (TSX: ATD.B), Dollarama Inc (TSX: DOL) etc. as peer group and arrived at a target price which implies a potential upside in double-digit (in percentage terms). Hence, we recommend a ‘Buy’ on L stock at the closing price of CAD 68.50 on April 30, 2020.

L One-Year Daily Price Chart (Source: Thomson Reuters)

Disclaimer

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