Brand Acquisitions to drive Improved Performance:  MTY Food Group Inc. (TSX: MTY) is a Montreal, Canada-based company and is one of the largest franchisors and operator of restaurants in North America, which provides quick-service and casual dining restaurants. As on 31st December 2019, the company have operations at 7,373 locations, majority of them are in the US (~55%) followed by Canada (~38%) and ~7% at other international locations.

Highlights and Business Outlook:

• The group recently announced that its restaurants are still operating and will continue to offer pick-up and home delivery services amid COVID-19 outbreak. However, it has closed its offices temporarily and implemented precautionary measures for its staff.

• The group is focusing on inorganic methods to achieve growth which as it has completed more than 50 acquisitions since 1999. In the recent past, the MTY successfully purchased a 70% stake in Turtle Jack’s Muskoka Grill, COOP Wicked Chicken and Frat’s Cucina. Going forward, the group is expected to look for more acquisition opportunities to drive growth along with a focus on operational efficiencies. 

Financial Highlight for the period ended 30^th November 2019

FY19 Income Statement Highlights (Source: Company Reports)

For FY19, the company reported revenue of CAD 550.94 million, as compared to CAD 412.35 million in FY18. The increase in revenue was driven by 30% growth in system sales and acquisition of Papa Murphy’s. The group posted a 0.4% of same-store sales growth, while Canada and U.S. sales grew by 1.1% and 0.4%, respectively, which was partly offset by a 7.8% of the decline in the international sales. EBITDA stood at CAD 147.4 million, as compared to CAD 124.9 million in FY18, representing an increase of 18% from the last year. Net income stood at CAD 77.74 million, down from CAD 96.19 million on account of higher tax expenses. There was a tax recovery in the previous financial year.

Stock Recommendation: The stock of MTY is quoting at CAD 24.31 with a market capitalization of CAD 605.08 million on 25th March 2020 closing. In year-over period its shares have registered a 52-week High of CAD 68.66 (as on 15th July 2019) and a 52-week low of CAD (18th March 2020). On a YoY basis, its shares have plunged around 57% and tumbled 56% on a YTD basis. However, a sharp recovery has been witnessed in the stock over the last five trading sessions, as stock is up approximately 47% in the past five traded sessions. Also, a strong bullish reversal has been spotted on the daily price chart, supported by volume spurt of 55% over 30-days average daily traded volume. Also, 3-day Relative Strength Index (RSI) of the stock hovering near the overbought zone and 9-day and 14-day RSI spotting in the neutral zone from a steep oversold zone over the past couple of months.

At the last closing level, its shares have traded at a P/E multiple of 7.9x, which was about 67% discount to its 52-week high P/E multiple of 24.4x, which reflects a lucrative valuation to accumulate at the current level. Also, the group is delivering positive same-store growth since 2012, while the management is focused on retaining the momentum in coming years. The return on equity (ROE) recorded by the group in the past several years was considerably above its peer’s average. Also, the group has decent fundamental metrics as it has maintained an EBITDA margin above 20% since past few years and even net margin of the company reported in the past couple of years was substantially above the industry median.

The outbreak of COVID-19 might impact business performance in the near term; however, long-term growth potential remains intact.

Therefore, considering the above rationale, a steep discounted valuation and sharp-reversal trend on the daily price chart of the stock, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 24.31 as on 25th March 2020.

MTY Daily Technical Chart (Source: Thomson Reuters)

High Liner Foods Incorporated

Innovation and Product Innovation to Drive Business Growth: High Liner Foods Incorporated (TSE: HLF) is engaged in processing and marketing of a wide range of frozen seafood, from breaded and battered items to seafood entrées. The group distributes to the food retailers and foodservice distributors across North American.

• During FY19, the company has streamlined its business to simplify its product portfolio and focuses on the products which have higher customer appeal and higher margins. Further, the management strategically reduced its product portfolio so that its resources can focus more on the profitable segments.

• During FY19, the business has developed an integrated supply chain network through the formulation of a cross-border operating system and emphasize on boosting the manufacturing efficiency through further centralization and standardization. Consequently, the group generated US$9.8 million in cost savings during FY19.

• For FY20, the Management believes that the impact of new business along with initiative taken in 2019 would help the group in achieving growth in the adjusted EBITDA. Further, the business expects an improvement in net debt to adjusted EBITDA due to higher Adjusted EBITDA along with improved cash flow management.

FY19 Financial Highlights: For the period ended 28^th December 2019, HLF reported revenue of US$ 942.22 million, stood lower from US$1,048.53 million in FY18. The decrease was due to a decline in sales volumes across retail and foodservice businesses as the group has exited from lower-margin businesses. Gross profit margin improved to 19.7% during the year from 17.9% recorded in the previous year. The business reported lower SG&A and distribution expenses during FY19 on account of lower sales volume. Adjusted EBITDA stood at US$85.3 million, witnessed a robust growth of 36.6% on y-o-y basis. The growth in adjusted EBITDA was due to the inclusion of US$5.5 million of recovery received from the ingredient supplier linked with the 2017 product recall. Net Income, on an adjusted basis, stood at US$ 29.14 million, improved drastically from US$ 17.049 million in FY18.

FY19 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of HLF closed at CAD 5.83 with a market capitalization of ~CAD 191 million. The stock made a 52-week low and high of CAD 5.2 and CAD 12.0, respectively. The stock corrected by 26.94% and 48.09% in the last three months and six months, respectively. The stock is available at an EV/EBITDA of 0.6x on a TTM basis, as compared to the industry (consumer non-cyclical) median of 1.3x. On a price to earnings basis, the stock is available at 5.0x on a TTM basis versus the industry median of 7.1x (consumer non-cyclical). The business seeks to obtain the value and synergies of its acquisition which is expected to aid growth for the business. The business further strategizes to transform the Rubicon shrimp business into high value product, which is expected to deliver margin expansion with an improved business prospect for the business within the North America market. Hence looking at the recent price movement, product innovation and margin expansion through high-value products & operational efficiency, we recommend a “Speculative Buy” rating in the stock at CAD 5.83, up 2.64% as on 26^th March 2020.

HLF Daily Technical Chart (Source: Thomson Reuters)

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.