Keyera Corp

Keyera Corp. (TSX: KEY) operates as an integrated Canadian-based midstream business. The Company is organized into two business units: Gathering and Processing Business Unit and Liquids Business Unit. The company operates over 5,000 kilometers of gathering pipelines and 15 natural gas processing plants.

Why Should Investors Book Profit?

• Falling Natural Gas Prices: Natural gas and its derivatives contributes significantly to the topline of the company. After stupendous rally in the Natural gas prices over the past year, its prices plummeted more than 10% over the past one week, after Russia's President Putin said Gazprom will send more gas to Europe via Ukraine.
• Uncertainties over Oil Price Sustainability: Some profit booking was witnessed in Crude oil on Wednesday after US Oil inventory increases as per the latest EIA data released on last Wednesday. Also, demand concern is still on the cards amid increasing COVID-19 cases in Western World. Therefore, Oil could remain highly volatile as majority of rally is backed by lower oil throughput in the market by OPEC+ cartel.
• Lower margin profile v/s Industry: In Q2 2021, the company failed on maintaining its pace and witnessed lower performance across operating margin matrix, which exhibits the pressure on company.
• Trading at Stretched Valuation: The stock is trading at a stretched valuations and is available at a forward EV/EBITDA multiple of 10.6x, which is quite high against the industry (Oil & Gas Related Equipment and Services) median of 7.7x. Also, the stock is available at a forward PE multiple of 15.9x, which is again higher than the industry median of 10.3x.
• Highly Leveraged Balance Sheet: At the end of Q2 2021, KEY’s Debt/Equity position stood at 1.28x whereas industry median is 0.69x. Moreover, its % long term Debt to total capital stood at 55.7% whereas industry median stood at 29.7x. This implies poor debt protection metrics.

Valuation Methodology Illustrative: Price to Cash Flow 

Stock recommendation

On the back of healthy price appreciation seen in the commodities price, the company delivered solid performance in the first half of 2021. However, Crude prices had mostly an artificial rally backed by supply squeeze created by major oil producing countries, which is not sustainable in the long run. Also, increasing COVID-19 cases in North America further posing oil demand uncertainties, which can potentially bring high volatility in the crude oil prices. Hence, we suggest investors to book profit given the significant dependency of stock price on the underlying commodity price movement. Therefore, we recommend a “Sell” rating on the stock at the closing price of CAD 31.15 on October 12, 2021.

Source: REFINITIV, Analysis by Kalkine Group

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

Equitable Group Inc.

Equitable Group Inc. (TSX: EQB) is a Canadian Company engaged in the financial services business, operating through its wholly owned subsidiary, Equitable Bank. It serves retail and commercial customers across Canada with a range of savings solutions and lending products, offered under the Equitable Bank and EQ Bank brands. 

Why Should Investors Book Profit?

• Growing risk of broader market correction: The resurgence in Delta variant cases and the latest episode of Chinese real estate giant “Evergrande” is throwing a lot of uncertainties. It might cause a volatility in the equity market, as a result the company might witness lower AUM which could further impact its operations and cash flows.
• Weak NIM and efficiency ratio: Despite strong operating performance across multiple sectors, the bank's NIM was at 1.81% compared to the industry median of 2.90%, its NIM is declining continuously on a sequential basis. Furthermore, its net efficiency ratio is also below the industry median at 40.9%. For financial businesses, the health of these ratios is essential, and any decline in these ratios is not considered a good sign.
• Lower % fee revenue: Fee income refers to fees collected from or paid by clients in exchange for services. Higher expenditures versus revenue reimbursed by the customer result in lower fee revenue. The institution's percent fee revenue is just 3.5%, compared to the industry median of 6.0%, which is much greater. Lower fee revenue as a percentage of total revenue is a reason of worry.
• Sequentially declining CET1 ratio: From the past quarters the bank’s CETI ratio is continuously declining which is an area of concern. At present in Q2 2021, it fell to 14.4% from 14.6% in Q4 2020.
• Trading above the upper band of the Bollinger Bands®: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating that the stock is perhaps overbought and due for a price correction or a consolidation.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to Book Value

Stock recommendation

In Q2 2021, EQB’s operating momentum across its diversified businesses continues to drive strong financial performance. However, on the flip side its NIM is at lower side at 1.81% against the industry median of 2.90%, the same trend was witnessed by its efficiency ratio, which may be a concern. Furthermore, the firm is witnessing lower % fee revenue and its CET1 ratio is also declining continuously on the sequential basis. Additionally, the debt problem at China's Evergrande has sparked fears of a market correction. This issue is anticipated to have an impact on the broader equities market. Therefore, based on the rationale discussed above and valuation, we recommend a "Sell" rating on the stock at the closing price of CAD 154.05 as on October 12, 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.