Bank of Montreal

Bank of Montreal (TSX: BMO) is a diversified financial-services provider based in North America, operating via four business segments: Canadian personal and commercial banking, U.S. P&C banking, wealth management, and capital markets. 

Why Should Investors Book Profit?

• Growing risk of broader market correction: China’s Evergrande’s debt crisis has now sent a fear of a potential market correction, as leading Chinese property lender is defaulting on interest payment. It is expected that this crisis may weigh on the broader equity market.
• Sequentially declining NIM and efficiency ratio: Despite healthy operating momentum across its diversified businesses, the company’s NIM is down on sequential basis at 1.57% from 1.59%. Also, its NIM is down against the industry median of 3.06%. Moreover, its efficiency ratio is not great. It reported net efficiency ratio of 56.0%, compared with 57.4% in pcp; adjusted net efficiency ratio of 55.7%, compared with 56.8% in pcp.
• Stretched valuations: BMO shares are available at an NTM Price/Book Value multiple of 1.4x compared to the industry (Banking Services) median of 1.0x. This implies that the shares are overvalued against the industry.
• Trading below long term SMA in a horizontal band: BMO shares moved decisively below the crucial short-term as well as long-term support levels of 50-day and 100-day SMAs, which implies a weakness in an underlying. Moreover, the stock is trading in a tight horizontal band.

Source: Refinitiv, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to Book Value

Stock recommendation

In Q3 2021, BMO’s operating momentum across its diversified businesses continues to drive strong financial performance. On the flip side, its NIM is down on sequential basis at 1.57% from 1.59%. Also, its NIM is down against the industry median of 3.06%. The same declining trend was witnessed in its efficiency ratio, which may be a concern. Additionally, the debt problem at China's Evergrande has sparked fears of a market correction, as the country's largest property lender has defaulted on interest payments. 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 125.3 on September 21, 2021. We have considered Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Canadian Western Bank, etc., as the peer group for the comparison. 

SNC-Lavalin Group Inc

SNC-Lavalin (TSX: SNC) is a fully integrated professional services and project management firm that offers a wide range of services, including financing, consulting, engineering and construction, procurement, and operations & maintenance.

Why should Investors Book Profit?

• Stretched valuation: SNC shares are available at an NTM EV/EBITDA multiple of 10.2x compared to the industry (Construction & Engineering) median of 8.5x, while on Price/Cash Flow multiple, the stock trades at 18.5x against the industry median of 9.9x. This implies that the shares are overvalued against the industry. The matrix below reflects that the stock is fairly overpriced on other valuation multiples also.

• Lower margin profile v/s Industry: In Q2 2021, the Company failed on maintaining its pace and witnessed lower performance across operating margin matrix against the industry, which exhibits the pressure on company.
• Weak liquidity profile: In Q2 2021, the company's current ratio was 0.94x compared to the industry median of 1.47x. While its Quick ratio was also on the lower side at 0.94x V/s 1.39x. Both 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.
• Higher average collection period: The company is having a higher average Accounts Receivable day of 114.6 days, against the industry median of 86.2 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.
• Heavily leveraged: The company’s debt to equity ratio at the end of June 2021 stood at 0.84x, higher than the industry median of 0.53x. Additionally, its % LT Debt to Total Capital stood at 43.0% against the industry median of 20.1%. These factors imply higher balance sheet risks.

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

The company witnessed solid financial results for the first half of the year. Its Engineering Services delivered robust second quarter performance led by strong profitability within all three segments.  Furthermore, the resurgence of Delta variant instances casts a cloud over the company's operations and future financials. Additionally, the firm has a longer average collecting duration and a poor margin profile along with stretched valuation on most of the valuation parameter. Therefore, based on the above rationale and valuation, we recommend a "Sell" rating on the stock at the closing price of CAD 36.60 on September 21, 2021.

One-Year Technical Price Chart (as on September 21, 2021). Source: REFINITIV, 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.