Sleep Country Canada Holdings Inc.

Sleep Country Canada Holdings Inc (TSX: ZZZ) is engaged in the retail of mattresses. It operates in the retail marketplace, offering mattresses and bedding-related products and operates in two segments SCC (Sleep Country Canada Holdings Inc) and Endy (Subsidiary). The company sells bedding products such as bed frames, pillows, mattress pads, sheets, duvets, headboards, etc.

Why Should Investors Book Profit?

• Increasing uncertainties: 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 may tighten some mandatory lockdowns to combat the spread.
• Lower merchandise and gross margin: In Q2 2021, the company failed on maintaining its pace and witnessed lower performance under merchandise margin and its gross margin compared to an industry median number, which exhibits the pressure on company.
• Weak liquidity profile: In Q2 2021, the company's quick ratio was 0.54x compared to the industry median of 0.72x, while the current ratio stood at 1.08x against the industry median of 1.48x. These lower ratios 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.
• Heavily leveraged: The company’s debt to equity ratio at the end of June 2021 stood at 1.22x, which was higher than the industry median of 0.44x. Additionally, its % LT Debt to Total Capital stood at 50.6% against the industry median of 14.8%. These factors imply higher balance sheet risks.
• Stretched valuations: ZZZ shares are available at an NTM EV/Sales multiple of 1.8x compared to the industry (Specialty Retailers) median of 0.8x, while on NTM Price/ Earnings multiple, it is trading at 14.1x compared to the industry median of 10.2x. This implies that the shares are 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 Q2 2021, its Cash Cycle stood at 59.5 days against 53 .0days in Q1 2021. Also compared to industry median its very high, which is at 41.2 days only.
  

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

Sleep Country delivering good results across all key parameters resulting substantial growth in topline sales and a CAD 17.5 million increase in net income. However, when compared to an industry median number, it underperformed in terms of merchandise margin and gross margin, indicating that the firm is under pressure. In addition, the company's liquidity ratios are low, and it is heavily leveraged, indicating that the balance sheet is in jeopardy. It also has a longer Cash Cycle (Days), meaning that the firm takes time in converting inventory into cash. Moreover, the stock is trading at the stretched valuations on multiple fronts compared to the industry. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 34.87 on November 1, 2021.

One-Year Technical Price Chart (as on November 01, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Firan Technology Group Corporation

Firan Technology Group Corp (TSX: FTG) is a supplier of aerospace and defense electronic products and subsystems. It has two operating segments namely FTG Circuits and FTG Aerospace. The company operates in Canada, United States, Asia, and Europe and generates significant sales from the United States.

Why Investor’s Should Book Profit?

• Fading sales: In Q3 2021, the company’s consolidated sales decreased by CAD 4.6 million or 19% to CAD19.7 million against CAD 24.4 million in Q3 2020. The COVID-19 pandemic has negatively impacted commercial aerospace activity as well as the weaker US dollar has negatively impacted sales reported in Canadian currency.

• Lower margin profile v/s Industry: In Q3 2021, the company failed on maintaining its pace and witnessed lower performance under its operating margin matrix, consisting of gross margin and EBITDA margin and net margin, which exhibits the pressure on company.

• Higher Cash Cycle days: 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 166.1 days compared to an industry median of 89.3 days.

• Exhausted technical indicators: The stock is continuously making lower highs and lower lows, which is considered as a bearish pattern. Additionally, it is trading below its long term EMAs of 50 days and 100 days, this also reflects the weakness in the prices.

Source: REFINITIV, Analysis by Kalkine Group

Stock recommendation

The company's consolidated revenues fell by CAD 4.6 million, or 19 percent, to CAD 19.7 million in Q3 2021, compared to CAD 24.4 million in Q3 2020. The company's gross margins followed the same pattern, falling to 19.2% from 27.6% in the prior equivalent quarter. The drop was mainly because of the COVID-19 pandemic, which hampered commercial aerospace activities. Furthermore, the resurrection of the delta variant is spreading turmoil once more, potentially affecting the aviation sector. Additionally, it also holds a longer Cash Cycle (Days), indicating that the organization takes longer to convert inventory to cash. Even the technical indication implies that the stock is in a bearish trend and that the price may correct or consolidate further. Therefore, based on the above rationales, we recommend a “Sell” rating on the stock at the closing price of CAD 2.50 on November 1, 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.