Colabor Group Inc.

Colabor Group Inc. (TSX: GCL) is a Canada-based distributor of food and food-related products. The Company operates through two segments: Distribution and Wholesale. The Distribution segment's operations include the distribution of food products in hotels, restaurants, and institutions (HRI) and the retail market. The Wholesale segment's operations include the sale of general food-related products to distributors from its distribution centre in Boucherville.

Investment Rationale

• Improved leverage ratios by decreasing debt: Net debt decreased to CAD 56.2 million as at September 5, 2020, compared to CAD 68.2 million at the end of the fiscal year 2019 which had a positive effect on the financial leverage ratio at 1.9x, an improvement from 2.5x, at the end of last fiscal year.

• Healthy Cash flows: Although the pandemic had and will continue to have an impact on revenue in the foreseeable future, the company does not currently expect a negative impact on its free cash flow.

Source: Company

• Improved EBITDA Margin: Adjusted EBITDA from continuing activities reached CAD 10.1 million or 8.4% of sales from continuing activities compared to CAD 8.5 million or 5.1%, up 19.5%. The improvement, as a proportionate of sales, is mainly due to improved gross profit margin.
• Price Hovering in Bullish Zone: Despite a 14% correction in the stock in October 20 trading session, the stock is still trading well above the support levels, which implies the stock is hovering in a bullish trend. Further, the 14-day RSI is hovering in a neutral zone and mostly tilted towards the overbought zone. Also, the difference between 12-day and 26-day EMAs is positive, another positive indicator.

Financial Overview (in thousands of Canadian dollars, except per share data)

Source: Company

• Sales declined to CAD120.9 million, compared to CAD165.8 million for the corresponding period of 2019, mainly due to termination of a contract in Specialized distribution activities, non-renewal of less-profitable contracts in distribution activities and by the effects of the Covid-19 pandemic.
• Net earnings from continuing operations declined to CAD 3.4 million compared to CAD 3.7 million for the corresponding period of 2019.

Segment overview

Source: Company

Risk associated to investment

The group’s top line is affected by fluctuations in inflation, seasonality, customer demand, during the summer months and over the holidays when retail sales trend higher and can result in more substantial operating results. These factors could negatively affect operations, financial results and the balance sheet of the Company.

Stock Recommendation

The company reported improved leverage ratios by decreasing debt, Healthy Cash flows, and Improved EBITDA Margins reflect the strength of the company. Further the company’s shares are hovering in a bullish zone. On the Valuation front, the stock is trading at a forward EV to EBITDA multiple of 6.5x, which is lower than the industry (food and drug retailing) average of 9.1x. Therefore, based on the aforementioned facts, we have given a “Hold” rating at the closing price of CAD 0.72 on October 20, 2020. We have considered Tyson Foods Inc, Archer-Daniels-Midland Co, etc. as the peer group for the comparison.

GCL daily technical chart. Source: Refinitiv (Thomson Reuters)

Disclaimer

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