Exchange Income Corporation

Exchange Income Corp (TSX: EIF) is a diversified acquisition-oriented corporation focused on opportunities in two sectors, aerospace, aviation services and equipment. The business plan of the corporation is to invest in profitable, well-established companies with strong cash flows operating in niche markets. 

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. Since the government may tighten some mandatory lockdowns to combat the spread, the passenger traffic might decrease.
  

• Lower gross margin and net margin: The company has witnessed a lower gross margin and net margin, compared to an industry median. Its gross margin stood at 38.4% against 45.3%, while the net margin stood at 5.1% compared to 7.4% respectively. Lower margins exhibit the pressure on the company.
  

• Stretched valuations: EIF shares are available at an NTM EV/EBITDA multiple of 7.7x compared to the industry (Transportation Services) average of 6.0x, while on NTM P/E multiple, it is trading at 14.9x compared to the industry median of 3.3x. This implies that the shares are overvalued against the industry.
  

• Heavily leveraged: The company’s debt to equity ratio at the end of June 2021 stood at 1.51x, which was higher than the industry median of 1.17x. Additionally, its % LT Debt to Total Capital stood at 58.9% against the industry median of 37.6%. These factors imply higher balance sheet risks.
  

• Long 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 193.5 days compared to an industry median of only 1.0 day.
  

• Higher average collection period: The company is having a higher average Accounts Receivable day of 85.7 days, against the industry median of 25.7 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.
  

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The company posted healthy numbers in Q2 2021, where it grew its Revenue, EBITDA and Adjusted Net Earnings, compared to the previous corresponding period. However, its gross margin and net margin remained at the lower side compared to an industry, exhibits the pressure. Furthermore, 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 company could witness regional travel restrictions and concurrent declines in passenger traffic. Additionally, it holds higher Cash Cycle (Days), implying the company takes more days to convert its inventory to cash, along this it also holds higher average Accounts Receivable days which could further propel difficulty for the company to have enough cash on hand to meet their financial obligations. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 43.65 on October 25, 2021.

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

Pizza Pizza Royalty Corp

Pizza Pizza Royalty Corp. (TSX: PZA) operates in a quick service restaurant (QSR) business and offers pizzas and other food items to its customers. The company derives its royalty income from more than 600 restaurant outlets.

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. Since the government may tighten some mandatory lockdowns to combat the spread, it would affect the company’s Royalty and operations.
• Registering weak sales: System Sales declined 5.5% to CAD 226.2 million for the six months ended June 30, 2021, compared to CAD 239.3 million in the prior year comparative period. Sales from the 622 Pizza Pizza restaurants in the Royalty Pool fell 4.3% to CAD 188.9 million in the six months ended June 30, 2021, while sales from the 103 Pizza 73 restaurants fell 11.1 percent to CAD 37.3 million.
• Clocking higher interest expense: The interest expense for the quarter and period increased due to a higher effective interest rate on the facility.
• Stretched valuations: PZA shares are available at an NTM EV/EBITDA multiple of 10.1x compared to the industry (Consumer Cyclicals) median of 7.9x, while on NTM P/E multiple, it is trading at 14.5x compared to the industry median of 12.3x. This implies that the shares are overvalued against the industry.
• Exhausting technical indicators: On the daily price chart, the stock has recently seen a robust rally and has moved near to the upper band of the Bollinger band, indicating that the company is possibly overbought and due for a price correction or consolidation.

Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology Illustrative: Price to Earnings

Stock recommendation

The company’s System Sales fell 5.5% to CAD 226.2 million for the six months ended June 30, 2021, compared to CAD 239.3 million in the preceding year's comparative period. On the other hand, the resurgence of Delta variant instances casts a cloud over the company's operations and cash flows. The company is also witnessing higher interest expense, which is squeezing its margin, additionally the stock is trading at stretched 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 11.62 on October 25, 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.