Mullen Group Ltd

Mullen Group Ltd (TSX: MTL) is the supplier of trucking and logistics services in Canada providing a wide range of service offerings including less-than-truckload, truckload, warehousing, logistics, transload, oversized and specialized hauling transportation. It provides a diverse set of specialized services related to the oil and natural gas industry in western Canada. 

Why Should Investors Book Profit?

• Stretched valuation: MTL shares are available at an NTM EV/EBITDA multiple of 7.5x compared to the industry median of 5.4x. This implies that the shares are overvalued against the industry. The stock is overvalued on multiple valuation parameters. The table below reflects the picture.

• Lower margin profile v/s Industry: In Q2 2021, the Company failed on maintaining its pace and witnessed lower performance across operating matrix against an industry, which exhibits the pressure on company.
• Higher average collection period: The company is having a higher average Accounts Receivable day of 62.3 days, against the industry median of 38.1 days. A higher average collection period indicates that the organization collects payments slower. This may create a difficulty for the company to have enough cash on hand to meet their financial obligations.
• Slightly over leveraged: The company’s debt to equity ratio at the end of June 2021 stood at 0.79x, higher than the industry median of 0.55x. Additionally, it’s % LT Debt to Total Capital stood at 38.6% whereas industry median is of 21.5%. These factors imply higher balance sheet risks.
• Trading near the upper band of the Bollinger Bands®: Recently, the stock witnessed a healthy rally on the daily price chart and has moved near 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 Sales

Stock recommendation

The company continued to deliver strong operating and financial performance in the second quarter, driven in 21.4% increase in total revenue and operating profit grew by 7.3%; but at the bottom line, it witnessed a dent, as its net income fell by CAD 1.3 million to CAD 21.7 million. Furthermore, the company reported lower margin profile v/s Industry along with higher average accounts receivables day against the industry median, exhibiting the pressure on company. Additionally, the company is trading at overvalued levels compared to the industry, even the technical indicators point to a possible price correction or consolidation. As a result, we recommend a “Sell” rating on the stock at the closing price of CAD 13.75 on September 13, 2021, based on the above rationale and valuation. 

Storm Resources Ltd.

Storm Resources Ltd (TSX: SRX) is a Canada-based oil and gas exploration and development company. Primarily it operates its business activities of exploration, acquisition, and production of oil, natural gas, and natural gas liquids reserves in the province of British Columbia.  

Why Should Investors Book Profit? 

• Increasing uncertainties: The resurgence in Delta variant cases is throwing a lot of uncertainties, it could impact the company’s operations and financials, as government could reinforce some mandated lockdowns to counter the spread.
• Lower liquidity profile: In Q2 2021, the company's current ratio was 0.41x compared to the industry median of 0.99x. 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.
• Sequentially increasing cash cycle days: The company is witnessing higher cash cycle days on the continuous basis. The company is holding higher Cash Cycle (Days) compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 26.2 days against the industry median of 11.7 days.
• Higher average collection period: The company is also having a higher average Accounts Receivable day of 45.1 days, against the industry median of 40.4 days. It is also increasing continuously on sequential basis. This indicates that the organization is collecting its payments at a slower pace. This may create a difficulty for the company to have enough cash on hand to meet their financial obligations.
• 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. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~79.77 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to Cash Flow

Stock recommendation

Improving commodity prices continue to provide a 'tail wind' with funds flow exceeding capital investment for the second consecutive quarter which resulted in debt being reduced by CAD18 million from the previous quarter and by CAD 30 million in the first half of 2021. However, the resurgence in Delta variant cases is throwing a lot of uncertainties on the company’s operations and future financials. Moreover, the company is witnessing higher cash cycle days and higher average collection period, which is increasing on the sequential basis, along with weak liquidity profile. Furthermore, the technical indicators point to a possible price correction or consolidation. As a result, we recommend a “Sell” rating on the stock at the closing price of CAD 4.32 on September 13, 2021, based on the above rationale and valuation.

*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.