Empire Company Limited (TSX: EMP.A) is a Canadian company which is engaged in the business of food retailing and related real estate. The Company's segments include Food Retailing, and Investments and Other Operations.

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.
• Weak liquidity profile: In Q2 FY22, the company's current ratio was 0.82x compared to the industry median of 1.34x, while the quick ratio stood at 0.38x compared to the industry median of 0.64x. 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.
• Long cash cycle days: The company’s Cash Cycle (Days) has increased compared to the previous sequential quarters, implying the company is taking more days to convert its inventory to cash. In Q2 FY22, its Cash Cycle stood at 35.1 days against 32.8 days in Q1 FY22. Also compared to industry median its very high, which is at 12.0 days only.
• Heavily leveraged: The company’s debt to equity ratio at the end of October 31, 2021, stood at 1.55x, which was higher than the industry median of 0.75x. Additionally, its Net Debt to EBITDA stood at 12.7x against the industry median of 7.5x. These factors imply higher balance sheet risks.
  

Valuation Methodology (Illustrative): EV to EBITDA Based 

Stock recommendation

The Company expects that same-store sales will continue to reduce in the remainder of fiscal 2022 as industry volumes decrease compared to the unusually high COVID-19 driven sales impacts in fiscal 2021. Furthermore, the resurgence of the delta variety and omicron is wreaking havoc, and its liquidity ratios are lower than the industry median, as well as its cash cycle days are higher, indicating a negative liquidity profile. Even the greater debt profile implies that the balance sheet is under stress. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 38.78 on December 29, 2021.

One-Year Technical Price Chart (as on December 29, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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