Onex Corporation

Onex Corporation (TSX: ONEX) is a private equity investment company. The company also works as an asset management company and invests its capital together with funds from public and private pension funds, sovereign wealth funds, banks, insurance companies, and family offices.

Key Highlights:

• Recently, the Company reported the sale 32.0 million share of SIG Combibloc Group, a leading systems and solutions provider for aseptic carton packaging at a price consideration of USD 540 million.
• Recently, the Company announced the promotion of Bobby Le Blanc for the post of President, wherein Mr. Le Blanc will oversee all of Onex’ business units.

Q2FY20 Operational Highlights: ONEX declared its quarterly results, wherein the company posted net earnings at USD 689 million, which includes net earnings of USD 657 million from its investing segment and net earnings of USD 32 million from its asset and wealth management segment. The Company reported total revenue of USD 754 million, as compared to USD 355 million in the previous corresponding period (pcp).  Gross profit stood at USD 706 million as compared to USD 317 million in pcp. The Company’s private equity investments generated a return of 16% during the quarter while on a half-yearly basis, the investments made a negative return of 4%. The Company reported an AUM growth of 5% on a year to date basis to USD 12.2 billion, aided by the issuance of three collateralized loan obligations of USD 1.1 billion. The firm has issued 23 CLOs since launching its CLO platform in 2012. During the month of June, the Company decided to invest ~USD 125 million in preferred shares of Ryan Specialty Group related to an add-on acquisition. At the end of the quarter, the Company reported a total share capital of USD 6,551 million.

Q2FY20 Balance sheet Details (Source: Company Reports)

Risks: The risk related to the private equity segment is significantly high compared to the listed businesses, as most of the businesses are comparatively smaller in sizes and has low economies of scale. Further, capital issuance is much easy in listed entities. Onex invests in private businesses, which indicates a high amount of risk associated with it, which might lead to a lower return to the investors.

Stock Recommendation: The stock of ONEX corrected ~24% and ~19% in the last six months and nine months, respectively due to a weakening macro scenario on account of COVID 19 pandemic. On a year to date basis, the company’s private equity investments have delivered a negative return, and we believe the group would likely to face setbacks due to tepid performance of the private equity segment across the globe. The company operates in investment management and Asset Management, and the performance is directly linked with the performance of the businesses it owns and the state of the economy. Since the near-term economic outlook is bleak, we believe that ONEX might not generate the desired return via its investments. The ONEX stock trades at a premium valuation as compared to the industry average. The stock is available at a price to book value of 0.7x on its trailing twelve months basis, as compared to the industry (financials) average of 0.4x. Hence, considering the aforesaid facts, price movements and stretched valuations, we recommend a ‘Watch’ rating on the stock at the closing market price of CAD 64.40 on August 21, 2020.

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

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