Canadian Western Bank

Canadian Western Bank (TSX: CWB) is a diversified financial service organization providing banking, trust, and wealth management services. The group operates through a number of subsidiaries providing different areas of financial services.

Why Should Investors Book Profit?

• Growing risk of broader market correction: The resurgence in Delta variant cases and the latest episode of Chinese real estate giant “Evergrande” is throwing a lot of uncertainties. It might cause a volatility in the equity market, as a result the company might witness lower AUM which could further impact its operations and cash flows.
• Weak NIM and efficiency ratio: Despite strong operating performance across many sectors, the company's NIM has fallen to 2.51%, compared to the industry median of 3.06%. In addition, its efficiency ratio is also in a poor shape. It had a net efficiency ratio of 48.7%, which is lower than the industry median of 56.5%. For financial businesses, the health of these ratios is essential, and any decline in these ratios is not considered a good sign.
• Lower % fee revenue: Fee income refers to fees collected from or paid by clients in exchange for services. Higher expenditures versus revenue reimbursed by the customer result in lower fee revenue. The institution's percent fee revenue is just 11.6%, compared to the industry median of 18.8%, which is much greater. Lower fee revenue as a percentage of total revenue is not a good sign.
• Tier 1 risk adjusted capital ratio on a lower side: Organization’s tier 1 risk-adjusted capital ratio is also on the lower side and fell sequentially to 10.8% in Q3 2021, compared to 11.2% in Q2 2021. It is also weak compared to industry median of 12.7%.
• Trading above the upper band of the Bollinger Bands®: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to Earnings

Stock recommendation

In Q3 2021, CWB’s operating momentum across its diversified businesses continues to drive strong financial performance. However, on the flip side, its NIM is at lower side on 2.51% against the industry median of 3.06%, the same trend was witnessed in its efficiency ratio, which may be an area of concern. Furthermore, the firm is witnessing lower % fee revenue. Additionally, the debt problem at China's Evergrande has sparked fears of a market correction. This issue is anticipated to have an impact on the broader equities market. Therefore, based on the rationales discussed above and valuation, we recommend a "Sell" rating on the stock at the closing price of CAD 37.90 on October 5, 2021.  

Tidewater Midstream and Infrastructure Ltd

Tidewater Midstream and Infrastructure Ltd. (TSX: TWM) is a Canada-based company operating within the midstream and infrastructure segment. The Company is engaged in natural gas processing, fractionation, liquids upgrading, storage and transportation, and marketing.

Why Should Investors Book Profit?

• Lower margin profile v/s Industry: In Q2 2021, the company failed on maintaining its pace and witnessed lower performance across operating margin matrix, consisting gross margin, EBITDA margin and operating margin against the industry, which exhibits the pressure on company.
• Heavily leveraged: The company’s debt to equity ratio at the end of June 2021 stood at 1.89x, which was higher than the industry median of 0.69x. Additionally, its % LT Debt to Total Capital stood at 62.5% against the industry median of 29.5%. These factors imply higher balance sheet risks.
• Long cash cycle days: The company’s Cash Cycle (Days) is increasing compared to the previous sequential quarter, implying the company is taking more days to convert its inventory to cash. In Q2 2021, its Cash Cycle stood at 79.9 days against 63.5 days in Q1 2021.
• Stretched valuations: TWM shares are available at an NTM EV/EBITDA multiple of 5.4x compared to the industry (Energy) average of 2.8x, while on NTM Price/ Cash Flow multiple, it is trading at 3.0x compared to the industry average of 2.6x. This implies that the shares are overvalued against the industry.
• Trading near the upper band of Bolinger Band: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

Tidewater Midstream continued to demonstrate the durability and stability of its integrated business strategy with another record quarter. With the formation of Tidewater Renewables Ltd, the business continues to expand in the energy industry. The company's liquidity ratios, on the other hand, are low, and it is heavily leveraged, suggesting that the balance sheet may be at risk. Furthermore, the firm has a lower margin profile than the industry. The technical indicators also suggests that the stock is overbought and there is a possibility of a price correction or consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 1.43 on October 05, 2021.

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.