First Capital REIT (TSX: FCR.UN) is a leading owner, operator and developer of mixed-use real estate located in Canada's most densely populated cities. First Capital's focus is on creating thriving urban neighborhoods to generate value for businesses, residents, communities and our investors.

Why Should Investors Book Profit?

• Increasing uncertainties: The resurgence of Delta and Omicron variant cases has raised a lot of questions, and it might have an influence on the company's operations and cash flows. Since the government may tighten some mandatory lockdowns to combat the spread, the passenger traffic might decrease.
  

• Long cash cycle days: The company’s Cash Cycle (Days) has increased compared to the previous sequential quarter, implying the company is taking more days to convert its inventory to cash. In Q3 2021, its Cash Cycle stood at 225.4 days against 162.9 days in Q2 2021.

• Weak liquidity profile: In Q3 2021, the company's quick ratio is declining on the sequential basis and stood at 0.71x compared to 0.98x in the previous sequential quarter, also against the industry median of 1.73x it is very low. The lower ratio against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.

• Stretched valuations:UN shares are available at an NTM EV/Sales multiple of 12.8x compared to the industry (Real Estate Operations) median of 2.4x, while on NTM EV/EBITDA multiple, it is trading at 21.9x compared to the industry median of 14.3x. This implies that the shares are overvalued against the industry. Higher valuation draws a caution line.

• Trading near the upper band of the Bollinger Bands: Recently, the stock witnessed a healthy rally on the daily price chart and has moved close to the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the stock has re-touched its previous resistance level, which it had previously attempted to breach but failed to do so. As a result, there is a strong likelihood of price consolidation or decline.
  

Valuation Methodology (Illustrative): EV to Sales Based

Analysis by Kalkine group 

Stock recommendation

During the third quarter, broad based re-openings and the further lifting of restrictions were notable, particularly in the Greater Toronto Area, the REIT's largest market, due to which the group posted robust numbers and healthy KPI’s. However, the resurgence of Delta variant cases has raised a lot of questions, and it might have an influence on the company's operations and cash flows as the government could impose some mandate restrictions. Additionally, it holds higher Cash Cycle (Days), implying the company takes more days to convert its inventory to cash, along this the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 18.19 (as on January 20, 2022).

One-Year Technical Price Chart (as on January 20, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

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