Royal Bank of Canada

Royal Bank of Canada (TSX: RY) is one of the two largest banks in Canada. It is a diversified financial services company, offering personal and commercial banking, wealth-management services, insurance, corporate banking, and capital markets services. The bank is concentrated in Canada, with additional operations in the U.S. and other countries.

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 and deposits which could further impact its operations and cash flows.
• Weaker Net Interest Margin: Despite strong operating performance across sectors, the bank's NIM was at 1.51%, compared to the industry median of 3.06%.
• Lower efficiency ratio: Moreover, its net efficiency ratio is weaker compared to an industry median, which stood at 55.6%. For financial businesses, the health of this ratio is essential, and any decline in this ratio is not considered a good sign.
• Trading near the upper band of the Bollinger Bands: Recently, the stock witnessed a healthy rally on the daily price chart and has moved close to the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the stock has re-touched its previous resistance level, which it had previously 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 Book Value

RY's strong performance in the third 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, 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 rationales discussed above and valuation, we recommend a "Sell" rating on the stock at the closing price of CAD 132.7 on October 26, 2021.  

Cominar Real Estate Investment Trust

Cominar Real Estate Investment Trust (TSX: CUF.Un) is a Canadian REIT, which operates through the ownership and management of properties throughout the Canadian provinces. The company’s portfolio comprises segments like office, retail, and industrial and mixed-use properties. 

Key Highlights:

• RSI is in an overbought zone: On a daily chart, the CUF.Un stock is quoting at a higher relative strength index (RSI) of 73.633, which indicates that the stock has entered a heavily overbought zone and suggests a possible correction from the current level. Moreover, the stock is trading above the upper band of its Bollinger band, which also suggest a possible correcting in coming trading sessions.

Daily Price Chart (October 26, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Weak Margin profile: In Q2FY21, the company reported its gross margin and EBITDA margin of 52% and 47.5%, respectively, significantly lower than the industry median of 68.8% and 59.4%, respectively. Additionally, the group reported a negative net margin of 55.6% in Q2FY21, as compared to the industry median of 20.3%. The above indicates weak operational efficiency, and the continuation of the above trend remains a key concern.

• Poor debt-protection metrics: In Q2FY21, the group reported its net debt to EBITDA of 44.53x, which is considerably higher than the industry median of 24.52x. A higher net debt to EBITDA ratio indicates a weak debt protection ability of the firm.

Valuation Methodology (Illustrative): EV to Sales-based

Stock Recommendation:

The company posted a higher D/E of 1.32x in Q2FY21, which is significantly higher than the industry median of 0.93x. Moreover, long term debt to total capital came at 56.8%, as compared to the industry median of 43.7%. A higher debt level is not a healthy sign and remains a major worry for the company. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like Artis Real Estate Investment Trust, Morguard Real Estate Investment Trust and Sienna Senior Living Inc. Considering the aforesaid facts, we recommend a ‘SELL’ rating on the stock of CUF.UN at the last traded price of CAD 11.58 on October 26, 2021.

One-Year Technical Price Chart (as on October 26, 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.