Pembina Pipeline Corp

Pembina Pipeline (TSX: PPL) is midstream company serving the Canadian and North markets with an integrated product portfolio. The firm has 3.1 million barrels per day of hydrocarbon pipelines, 6.1 billion cubic feet per day of gas processing capacity, as well as assets across fractionation, storage, and propane exports.

Why Investor’s Should Book Profit?

• Lower margin profile v/s Industry: In Q2 2021, the company failed on maintaining its pace and witnessed lower performance under operating margin matrix, consisting of gross margin and EBITDA margin, which exhibits the pressure on company.
• Weak liquidity profile: In Q2 2021, the company's quick ratio was 0.52x compared to the industry median of 0.81x, while the current ratio stood at 0.69x against the industry median of 0.97x. 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.
• Heavily leveraged: The company’s debt to equity ratio at the end of June 2021 stood at 1.04x, which was higher than the industry median of 0.67x. Additionally, its % LT Debt to Total Capital stood at 44.1% against the industry median of 29.3%. These factors imply higher balance sheet risks.
• Stretched valuations: PPL shares are available at an NTM EV/EBITDA multiple of 11.0x compared to the industry (energy) median of 5.9x, while on NTM Price/ Cash Flow multiple, it is trading at 10.1x compared to the industry average of 4.8x. This implies that the shares are overvalued against the industry.
• Exhausted technical indicators: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~71.94 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

Pembina reported earnings of CAD 254 million for the second quarter, two percent lower than the same period in the prior year.  Earnings in the second quarter also were negatively impacted by lower income. It also witnessed higher finance cost. Furthermore, the company's liquidity ratios are in poor shape, and it is significantly leveraged, implying that the balance sheet is at danger. Additionally, it holds higher Cash Cycle (Days), implying the company takes more days to convert its inventory to cash. 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 42.59 on October 15, 2021. 

First Quantum Minerals Ltd

First Quantum Minerals Ltd (TSX: FM) is a Canada-based company engaged in the production of copper, nickel, gold, zinc, silver and acid, and other related activities including exploration and development of mining properties. 

Why Should Investors Book Profit?

• Lower margin profile v/s Industry: In Q2 2021, the company failed on maintaining its pace and witnessed lower performance across operating margin matrix, consisting of gross margin and net margin against the industry, which exhibits the pressure on company.
• Heavily leveraged: The company’s debt to equity ratio at the end of June 2021 stood at 0.93x, which was higher than the industry median of 0.19x. Additionally, its % LT Debt to Total Capital stood at 41.2% against the industry median of 9.9%. These factors imply higher balance sheet risks.
• Stretched valuations: FM’s shares are available at an NTM EV/Sales multiple of 2.6x compared to the industry (Metals & Mining) average of 1.9x, while on NTM Price/ Cash Flow multiple, it is trading at 5.4x compared to the industry average of 2.7x. This implies that the shares are overvalued against the industry.
• Higher 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 128.2 days compared to an industry median of 56.3 days.
• Exhausted technical indicators: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~77.21 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

   Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology Illustrative: EV to Sales

Stock recommendation

The second financial quarter saw continued strong operational and financial performance. However, it failed to beat the industry median margins at gross margin and net margin fronts, which exhibits the pressure on the company. Furthermore, the company's liquidity ratios are in poor shape, and it is significantly leveraged, implying that the balance sheet is at danger. Additionally, it holds higher Cash Cycle (Days), implying the company takes more days to convert its inventory to cash. 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 29.90 on October 15, 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.