Manulife Financial Corporation

Manulife Financial Corporation (TSX: MFC) is a leading international financial services group that offers financial advice, insurance, and wealth and asset management solutions to individuals, groups and institutions. With its global headquarter in Toronto, Canada, the group operate as Manulife across Canada, Asia, and Europe, and as John Hancock in the United States.

Investment Rationale:

• Enhancing Virtual Presence: The company is focusing on enhancing its market presence through digital marketing. Almost 97% of the total products are accessible virtually. The company launched JH eApp, a digital new business platform in order to simplify and accelerate the life insurance purchase experience and also launched a new, fully underwritten term life product, which provides customers to purchase up to USD 1 million in life insurance coverage digitally. Considering the current scenario, we expect encouraging performance from digital marketing segment.
• Improved Operational Efficiency: The company is focusing on strong cost management and has reduced its core general expense by almost 5%. Furthermore, the company delivered a 3.6 percentage point improvement in its efficiency ratio. Further, by the end of FY20, the company expects to cut-down its total costs by ~CAD 1 billion, which augurs for improved margins.
• An Income Play: At the last traded price, the stock was offering a dividend yield of 5.83%, which is lucrative considering the current interest rate environment.

Q2FY20 Financial Highlights:

• For the second quarter of FY20, Manulife reported revenue of CAD 27,486 million, which improved drastically from CAD 22,220 million in Q2FY19, underpinned by significant growth in the net investment income and combined with a higher realized and unrealized gains.
• The group’s reported income before income taxes stood lower at CAD 832 million, against CAD 1,756 million in pcp. The quarter was marked by higher total contract benefits and expenses, on account of higher net benefits and claims, partially supported by a decrease in commissions, interest expense and lower net premium taxes.
• Q2FY20 net income stood at CAD 839 million against CAD 1,516 million in Q2FY19, primarily attributable to narrowing corporate spreads and the steepening of the yield curve in the US, partially offset by gains from the sale of available-for-sale bonds combined with gains from the direct impact of equity markets and variable annuity.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company’s performance is linked to global equity markets, and a volatility in the capital market would subsequently impact the company’s performance.

Valuation Methodology: Price to Book Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:  The stock of MFC corrected ~27% so far this year, due to a sluggish economic outlook on account of the COVID 19 pandemic. In the recent past, the company witnessed a surge within the core earnings, driven by favorable policyholder experience combined with the impact of markets on seed money investments in segregated funds and mutual funds, and the impact of in-force business growth in Asia. We have valued the stock using P/BV based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Insurance) median on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 19.21 on October 23, 2020.

MFC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Enbridge Inc

Enbridge Inc. (TSX: ENB) is an energy infrastructure company with business platforms that include a network of crude oil, liquid and natural gas pipelines, regulated natural gas distribution utilities and renewable power generation. 

Investment rationale 

• Improved Refined product demand: The company mentioned that the refined product demand in North America is improving gradually; however, the company remains cautious on full recovery timing. With the gradual easing in the containment measures, we expect the improvement in demand to continue in the near term.

Source: Company 

• Strong Financial Performance: the company has shown the strength and resilience in delivering the healthy numbers where the scenario was completely against them.

Source: company

• Strong Financial Position:The company is maintaining its sector-leading financial strength and flexibility as 2020 funding needs has already met, and the company has initiated pre-funding of 2021. As of June 30, 2020, the company is equipped with CAD 14 billion of liquidity.

Source: Company

• An income play: The company has a long history of distributing dividend, and as each year passes, we saw an increment in this amount. This translates in an essential factor for regular income-seeking investors with a long-term horizon. During the current quarter, the Management announced a dividend of CAD 0.81 per common share. At the last traded price, the stock was offering a dividend yield of 8.53%.

Source: Company 

Financial Overview of 2Q 2020

Source: Company 

• Distributable Cash Flow in 2Q 2020 came to CAD 2,437 million, an increase of CAD 127 million against the same quarter in 2Q 2019

• In 2Q 2020, Net earnings attributable to common shares was down by CAD 89 million to CAD 1,647 million compared to CAD 1,736 million reported in 2Q 2019.

• Adjusted EBITDA in the second quarter of 2020 increased by CAD 104 million to CAD 3,312 million compared to CAD 3,208 million reported in 2Q 2019. The increase was driven by strong utilization in Gas pipelines and utility. Contributions were also made from news assets that the company placed into service in 2019 and Q1 2020.

Revenue Bifurcation

Source: Company 

Upcoming event

The company is going to announce third quarter results before markets open on November 6, 2020. 

Risks associated to investment 

The company is exposed to many risk factors which alone or in a cumulative manner can affect the company’s operations and financial health. Some of the risks are like the supply of and demand for crude oil, natural gas, natural gas liquids and renewable energy, prices of these commodities, exchange rates, inflation, interest rates, the COVID-19 pandemic impact the economies and business environments in which Enbridge operates.

Valuation Methodology (Illustrative): EV to Sales

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company made excellent progress on its expansion program during the first half of 2020. It is currently working on CAD 11 billion of expansion projects that should start up through 2022. Further, the group stated that it could grow its distributable cash flow per share at a 5% to 7% annual rate through 2022. Also, the majority of the cash flows comes from reservation-based revenue contracts, and over 90% of the customers are investment grade. Therefore, based on the above rationales and valuation, we have given a “Buy” rating at the closing price of CAD 37.99 on October 23, 2020. We have considered TC Energy Corp, Plains All American Pipeline LP, Kinder Morgan Inc etc. as the peer group for the comparison. 

ENB daily technical chart. Source: Refinitiv (Thomson Reuters)

Chartwell Retirement Residences

Chartwell Retirement Residences (TSX: CSH.UN) is engaged in the ownership, operation, and management of retirement and long-term care communities in Canada. The Retirement Operations segment includes approximately 172 properties that it owns and operates in Canada.  The Long-Term Care Operations segment has around 24 properties in Ontario.

Investment rationale

• Leading player in retirement operations: The company is the most influential player in retirement operations segment in Canada. Through this segment, the company is generating almost 75% of its total revenue. While in Long term care operations, the company holds nearly 26% share in the industry.

Source: Company 

• Collaboration with Batimo: The company made a collaboration with Batimo to build a pipeline of future acquisition opportunities by participating in specific development projects in the province of Quebec. Recently one project (Chartwell Le Teasdale II) has achieved predefined stabilized occupancy, and now the company expect to complete the acquisition of an 85% ownership interest in this project for a purchase price of approximately US$ 54.4 million in Q4 2020.

Source: Company Profile

• Healthy balance sheet: As on August 6, 2020, the company’s liquidity amounted to CAD 408.8 million, this includes CAD 82.8 million of cash and cash equivalents and CAD 326 million of available borrowing capacity on its credit facilities. Other than this, CAD 14.4 million is held in cash and cash equivalents of the company’s share in its equity-accounted joint ventures. The unencumbered Asset Pool Value stands at CAD 927.9 million.

• An Income Play: The company has a healthy practice of dividend pay-out; this translates in an essential factor for regular income-seeking investors with a long-term horizon. At the last closing price, the stock was offering a lucrative dividend yield of 5.93%.

Source: Company Profile

2QFY20: Financial Overview

• Resident revenue increased by CAD 2.6 million or 1.2% in Q2 2020 against the year over period.
• Direct property operating expenses increased CAD 8.4 million or 5.7% in Q2 2020, due to COVID-19-related expenses, acquisitions and developments, including pre-leasing and initial operating costs.
• In Q2 2020, net loss was CAD 1.9 million compared to CAD 1.6 million in Q2 2019. The increase in net loss was primarily due to higher property operating expenses and finance costs.

Composition of owned and managed portfolio:

Source: Company

Geographic Location of Portfolio of Owned Suites/Beds

Source: Company

Upcoming Event

The company will release its financial results for the three and nine months ended September 30, 2020 on November 5, 2020.

Risks associated to investment

The company is exposed to a variety of risks which include changes in government regulation and oversight, changes in consumer preferences, fluctuations in occupancy levels and business volumes, competition from other senior’s care providers, changes in neighbourhood or location conditions and general economic conditions.

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Refinitiv (Thomson Reuters)

Stock Recommendation

We expect that the demand would increase significantly for the retirement suites.  To capitalize the demand, the company is making a series of efforts. They are going for acquisition and are making collaborations.

Based on the rationales discussed above and valuation, we have given a “Buy” rating at the closing price of CAD 10.32 on October 23, 2020. We have considered SmartCentres Real Estate Investment Trust, Killam Apartment REIT, RioCan Real Estate Investment Trust, etc. as the peer group for the comparison.

1-year Price Chart (as on October 23, 2020, after the market close). Source: Refinitiv (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.