Ritchie Bros. Auctioneers

Ritchie Bros. Auctioneers (TSX: RBA) operates the world's leading marketplace for heavy equipment. The group is a live auctioneer of industrial equipment and enhanced its operations across construction, agricultural, oilfield, and transportation equipment across several venues.

Key Updates:

• Decline in GTV: In Q3FY21, the company reported its total Gross Transaction Value (GTV) of USD 1,270.258 million, reflecting a slide of 4% on y-o-y basis due to unfavorable supply environment across all regions. A lower GTV denotes lower operating performance, and the continuation of the above trend is likely to dampen the company’s upcoming performance.

• Lower profitability: At the end of Q3FY21, the company reported its operating income and net income of USD 53.619 million and USD 32.357 million, respectively, reflecting a fall of 20% and 29%, respectively, on y-o-y basis. The above was primarily due to the higher cost of inventory sold (USD 102.993 million v/s USD 96.253 million in pcp) and higher operating expenses (USD 276.063 million v/s USD 264.158 million in pcp).

• Weak liquidity: In Q3FY21, the company posted its current ratio of 1.21x, lower than the industry median of 1.36x. The above indicates that the company is struggling to manage its short-term liabilities with its current assets.

• Technical suggesting a possible correction: On a daily chart, the RBA stock is trading near the upper range of the 20-days Bollinger band, which is a bearish signal. Moreover, the 14-days RSI is trading higher at 68.9224, which also suggests a possible downside from the current level.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The company reported a long cash conversion time of 124.5 days in Q3FY21, as compared to the industry median of 36.3 days, which indicates that the group lags to convert its investments in inventory and other resources into cash flows. Moreover, the company group reported a lower operating margin of 16.3% and 20.3%, respectively, in Q3FY21 and 9MFY21, as compared to 20.3% and 19.1% in Q3FY20 and 9MFY20, respectively. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like GDI Integrated Facility Services Inc, Stantec Inc etc. Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock of RBA at the last traded price of CAD 91.32 on November 17, 2021.

One-Year Technical Price Chart (as on November 17, 2021). Analysis by Kalkine Group 

Osisko Gold Royalties Ltd

Osisko Gold Royalties Ltd (TSX: OR) is a Canada-based intermediate precious metal royalty company. The Company holds a North American focused portfolio of over 140 royalties, streams and precious metal offtakes.

Why Should Investors Book Profit?

• Natural calamities playing destructive role: Floods and landslides have recently occurred in Canada's western region. The two days of severe rain in British Columbia's Pacific province triggered significant floods. Furthermore, as a result of the natural disasters, the premier of the Canadian province of British Columbia (BC) has proclaimed a state of emergency. We believe that the group's activities will be disrupted because of this, and that this will have an impact on cash flow.

• Lower margin profile v/s Industry: In Q3 2021, the company failed on maintaining its pace and witnessed lower performance across operating margin matrix, where it reported negative operating margin and negative net margin, which exhibits the pressure on company.

• Stretched valuations: OR shares are available at an NTM Price/Cash Flow multiple of 17.2x compared to the industry (Basic Material) median of 4.5x, while on NTM EV/Sales multiple, it is trading at 13.3x compared to the industry median of 1.6x. This implies that the shares are highly overvalued against the industry.

• 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 Q3 2021, its Cash Cycle stood at 156.5 days against 120.0 days in Q2 2021. Also compared to industry median its very high, which is at 54.4 days only.

• Exhausted technical indicators: 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 momentum oscillator RSI (14-Period) is trading at ~71.89 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): EV to Sales

Stock recommendation

The two days of severe rain in British Columbia's Pacific province triggered significant floods. Furthermore, as a result of the natural disasters, the premier of the Canadian province of British Columbia (BC) has proclaimed a state of emergency. We believe that the group's activities will be disrupted because of this, and that this will have an impact on cash flow. Furthermore, the company witnessed lower performance under operating matrix, where it is having negative margin, which implies pressure. Moreover, it also has a prolonged Cash Cycle (Days), which may create a difficulty for the company to have enough cash on hand to meet their financial obligations. Additionally, the stock is trading at premium valuations even 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 16.84 on November 17, 2021. 

Diversified Royalty Corp

Diversified Royalty Corp (TSX: DIV) is a multi-royalty company, which is engaged in the business of acquiring royalties from multi-location businesses and franchisors in North America.

Why Should Investors Book Profit?

• Decline in cash balance: At the end of Q3FY21, the company reported a cash balance of CAD 7.164 million, which is significantly lower than CAD 9.218 million in FY20. A lower cash balance might hinder the company’s overall liquidity.
  

• Constant increase in total debt: During the last few quarters, the company reported an increase in its total debt, which remains a key concern. Continuation of the above trend might hinder the overall financial flexibility of the firm. Notably, in Q3FY21, the company posted its total debt of CAD 169.3 million, which is the highest in the last five quarters. Notably, the D/E ratio of the firm stood at 0.90x in Q3FY21, higher than the industry median of 0.38x.

• Poor debt protection metrics: At the end of Q3FY21, the company reported its net debt to EBITDA of 18.51x, as compared to the industry median of 2.13x. The above indicates a weak debt protection ability of the firm when compared to the industry median. Meanwhile, the company recorded its long term to total capital of 47.2% in Q3FY21, significantly higher than the industry median of 13.6%.

Valuation Methodology (Illustrative): Price to Earnings based

Stock Recommendation:

The subsidiaries of the firm might witness cyclicality and seasonality, which would further dampen the company’s overall performance. Additionally, the company reported its cash conversion period of 43.4 days in Q3FY21, higher than the industry median of 40.4x, which indicates that the company takes more days to convert its inventory to cash. We have valued the stock using the Price to Earnings-based relative valuation approach and arrived at a target price offering double-digit downside potential (in % terms). We have considered peers like Crown Capital Partners Inc, Perpetual Ltd etc. Hence considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock at the last traded price of CAD 2.82 on November 17, 2021.

One-Year Technical Price Chart (as on November 17, 2021). Analysis by Kalkine Group

*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.