Home Capital Group Inc

Home Capital Group Inc (TSX: HCG) is a specialty finance company that offers residential and commercial mortgage lending, securitization of insured mortgage products, consumer lending, and credit card services. 

Why Should Investors Book Profit?

• Growing risk of broader market correction: The resurgence in Delta variant cases and lastly Bank of Canada terminated its “QE program” and said rate hikes are likely to happen by mid-2022, both these factors are generating a lot of uncertainties. It might cause a volatility in the equity market, as a result the company might witness lower AUM and deposits which could further impact its operations and cash flows.

• Degrading Net Interest Margin: Despite strong operating performance across sectors, the group's NIM ratio in Q2 2021 stood at 1.61%, compared to the industry median of 2.90%.

• Lower efficiency ratio: Moreover, its net efficiency ratio in the reported period is weaker at 42.2% compared to an industry median of 50.7%. For financial businesses, the health of this ratio is essential, and any decline in this ratio is not considered a good sign.

• Declining total loan portfolio: The group’s total loan portfolio stood at CAD 17.16 billion at the end of Q2 2021, which decreased by 0.7% from the end of Q1 2021 and 0.3% from the end of Q2 2020.

• Exhausted technical: Recently the stock has re-touched its previous resistance level, which it had attempted to breach but failed to do so. As a result, there is a strong likelihood of price consolidation or decline.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to Earnings

Stock recommendation

Group’s strong performance in the second quarter was supported by solid revenue growth as economic activity and employment levels continued to improve on both sides of the border. However, its NIM is at the lower end compared to industry median and even its efficiency ratio is lower compared to industry median, which may be an area of concern. Additionally, its total loan portfolio also declined by 0.7% on sequential basis. Recently, the Bank of Canada terminated its “QE program” and said rate hikes are likely to happen by mid-2022. This issue 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 40.16 on October 29, 2021.

TVA Group Inc.

TVA Group Inc. (TSX: TVA.B), a subsidiary of Quebecor Media Inc., is a communications company engaged in the broadcasting, film production and audiovisual services. The company also offers international production and distribution of television content, and magazine publishing industries. 

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. The reduction in advertising revenues in markets or sectors is still affected by the public health crisis, which will inevitably affect the Broadcasting and Magazines segments.
• Weak performance from magazine segment: Due to the challenging scenario in the sector, magazine segment witnessing declining trend for some years, which was compounded by diminished government assistance. Hence, the Magazines section reported a fall in profitability.
• Lower margin profile v/s Industry: The company failed on maintaining its pace and witnessed lower performance across operating margin matrix, which exhibits the pressure on company.
• Higher average collection period: The company increased its Accounts Receivables in Q3 2021 to CAD 155.4 million against CAD 137.1 million in pcp. A higher amount 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.

Stock recommendation

In the latest financial numbers presented by the company its magazines segment reported a decrease in profitability due to the difficult situation in the industry for a number of years, which was exacerbated by the reduced government support. Furthermore, the company is not managing its working capital efficiently as a result its accounts receivable has increased, which indicates the company may create a difficulty to have enough cash on hand to meet their financial obligations. Along this its short-term debts are also on a higher note. Moreover, interest rate hike is coming soon to control inflationary pressure, which will accelerate defaults as many businesses are still struggling from the COVID-19 led disruptions lately. Therefore, based on the rationales discussed, we recommend a "Sell" rating on the stock at the closing price of CAD 2.85 on October 29, 2021.

Technical Price Chart (October 29, 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.