Richelieu Hardware Ltd 

Richelieu Hardware Ltd (TSX: RCH) is engaged in importing, manufacturing, and distributing specialty hardware and complementary products. The company offers products which are used in home and office furnishing such as storage and closet, kitchen and bathroom cabinet, door and window, residential and commercial woodworkers etc.

Q2FY20 Financial Highlights: RCH announced its second-quarter results, wherein, the group posted sales of CAD 248.253 million, as compared to CAD 281.067 million in the previous corresponding period (pcp). The decline was due to the negative impact from the pandemic, which resulted in a 13.1% y-o-y decline from the manufacturing markets and a marginal decline within the hardware retailers and renovation superstores segment. Earnings before amortization, financial costs and income taxes stood at CAD 33.770 million, declined from CAD 34.371 million in Q2FY19, due to lower revenue, which was partially offset by a slide in the operating expenses. Earnings before income taxes stood at CAD 24.448 million against CAD 26.370 million in pcp. The decline was on account of higher amortization expense, partially offset by a lower finance cost. The company reported a lower net income of CAD 17.783 million as compared to CAD 19.189 million in pcp. The company reported cash and cash equivalents of CAD 42.562 million, while total assets stood at CAD 729.941 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: he operations of the Company were impacted by the closure of the distribution centers, primarily across the Quebec, Ontario and Northeast and Midwest markets. Extended shut down of the distribution centers would further dampen the performance of the Company.

Valuation Methodology: P/E Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of RCH witnessed higher traction and increased by 27% so far this year. Despite a store closure across the prime locations, the business has managed to report a decent top-line and bottom-line during the quarter. The business has benefited from the recent acquisition, which is a key positive and the company is focusing on new acquisition prospects in order to drive improved business performance. The company is financially strong with low D/E ratio and has ample liquidity of net cash of CAD 31.2 million, which seems sufficient to navigate through the current challenging environment. Furthermore, the Management clarified that it has the capital to meet its ongoing commitments and obligations and fund its financing and investing activities for the current financial year. The Corporation continued to operate in all of its centers with a reduced workforce in order to further serve its customers. Operations gradually resumed their course towards the end of the quarter, and this in accordance with deconfinement rules specific to each province. The stock of RCH gained ~28% and ~32% in the last nine months and one year, respectively. We have valued the stock using Price to Earnings relative valuation method and have arrived at a lower double-digit downside (in percentage terms). For the said purposes, we have considered peers like Leggett & Platt Inc, CanWel Building Materials Group Ltd etc. Hence, considering the aforesaid facts, current price movements, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 34.54 on September 10, 2020.

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

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