Bank of Montreal

Bank of Montreal (TSX: BMO) is a financial services provider that provides a range of personal and commercial banking, wealth management and investment banking products and services. The bank conducts its business through three operating groups: Personal and Commercial Banking (P&C), Wealth Management and BMO Capital Markets. The bank has over 900 bank branches in Canada and the United States.

Investment rationales

• Relatively undervalued from a Price-to-Book Value standpoint: Bank’s shares are trading at an LTM P/BV of 1.05x, whereas the industry average P/BV stands at 1.66x.
• Strong capital and liquidity position: With a liquidity coverage ratio of 147%, the bank has the capacity to continue to absorb the impacts of an uncertain environment. The bank’s Common Equity Tier 1 (CET1) ratio was 11.6% as on July 31, 2020, which is above the regulatory requirements. This increased from 11.0% at the end of the second quarter mainly driven by retained earnings growth.
• An income play: The bank declared a dividend of CAD 1.06 per share on May 27, 2020. This was in line with the previous quarterly dividend; however, it was 3% higher from the previous corresponding period (pcp). At the last traded price, the stock was offering a dividend yield of 5.18%, which is lucrative considering the current interest rate environment.

Financial Results Highlights of Q3-2020

• The bank reported a Net income of CAD 1,232 mn, compared to CAD 1,557 mn while adjusted net income was CAD 1,259 million, compared to CAD 1,582 mn.
• Bank generated an EPS of CAD 1.81, compared to CAD 2.34 while adjusted EPS stands at CAD 1.85, compared to CAD 2.38
• Revenue, net of CCPB were CAD 6,000 mn, up by 4%.
• Provision for credit losses (PCL) was of CAD 1,054 mn, compared to CAD 306 mn. This quarter includes PCL on performing loans of CAD 608 mn.
• Common Equity Tier 1 ratio stood at a healthy level of 11.6%
• Dividend of CAD 1.06, unchanged from the prior quarter, but up by 3% from the prior year 

Share Price Performance

Source: Refinitiv, Thomson Reuters

Risk

The COVID-19 pandemic has heightened risks of higher non-performing assets for the FY20. Further, a low-interest-rate environment and increased chances of loan default are likely to put pressure on the bank's performance, as the lower interest rate would drag NIM and heightened uncertainties may lead to a rise in provisioning.

Valuation (Illustrative): Price to Book Value

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

Stock Recommendation

Due to the current demand destruction scenario in the economy, the Company took a conservative approach and made higher provision for credit losses. Though the higher provisioning has taken a toll on the profitability, it is likely to provide a cushion against the future setbacks if non-performing assets surge. Further, a lower interest rate environment is likely to help the bank in expanding the loan book, while it would put pressure on the net interest margin. We expect the performance of the capital market segment to improve as the global equity markets have recovered well, and millions of new investors and traders have joined the league.

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 peers like Canadian Imperial Bank of Commerce, Bank of Nova Scotia, Royal Bank of Canada etc. Considering a healthy balance sheet, healthy dividend pay-outs, efficient capital management, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 81.78 on 9 October 2020.

Scotia Bank

Scotia Bank (TSX: BNS) is a leading bank in North America and has tremendous market presence across Canada. The Group also operates across the markets of Mexico, Peru, Chile and Colombia. BNS group offers an array of financial and banking services which includes wealth management and banking solution. Other banking services include debit card & credit services, mortgages and loans, investments etc.

Investment Rationale

• Sound financials: The Bank reported a strong Common Equity Tier 1 capital ratio of 11.3% along with a liquidity coverage ratio of 141% for Q3 2020. This makes them in a strong position to continue to support their customers, maintain the dividend, and grow the loan book.
• NII on a rising trend: Bank is delivering high on the front of NII numbers. The bank’s NII grew 31% between FY15-FY19. For the nine months ended July 2020, the bank has already realized the NII of 13BN.

Source: Refinitiv, Thomson Reuters

• Healthy Dividend pay-out: Bank has a healthy practice of dividend pay-out; this translates in an important factor for regular income-seeking investors with a long-term horizon. During the current quarter, the Management announced a dividend of CAD 0.90 per common share, which was in line with the previous corresponding period.

Source: Company Report

Financial Performance Summary

• Total revenues generated by the bank stood at CAD 7,734 MN compared to CAD 7,956 MN on Q-o-Q basis, due to lower net interest income and non-interest income.
• Net interest income was CAD 4,253 MN, fell by 4%, based on lower contribution from asset/liability management activities and the negative impact of foreign currency translation. A rise in the mix of lower margin treasury assets and lower margins across all business lines due to the declining interest rate also played a vital role in bringing down the NII.
• Net income was CAD 1,304 MN compared to CAD 1,324 MN had shown a flat performance on Q-o-Q basis, mainly due to higher provision for credit losses on performing loans and lower revenues, partially offset by lower non-interest expenses and income taxes.
• Provision made by the bank were CAD 2,181 MN, compared to CAD 1,846 MN, increase by 18%.

Share Price Performance

Source: Refinitiv, Thomson Reuters

Risk

A lot of businesses faced a temporary shutdown owing to the COVID-19 Pandemic, which is likely to result in a higher unemployment rate. Further, these businesses might take time to resume operations and generate profitability. Consequently, the bank might face a delay in receiving the repayment of loans, and the demand for new loans might be affected, which could dampen the bank’s performance.

Valuation Methodology (Illustrative): Price to Book Value

Stock Recommendation

The group reported a decent result amid a challenging operating environment. The group followed a conservative approach and increased its provisioning during the quarter, which is likely to provide a cushion in case any assets turned bad in the near term. The group is a friend of income investors as it has a decent track record of dividend payment. At the last traded price, the stock was offering a dividend yield of 6.38%, which is lucrative considering the current interest rate environment.

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 peers like Canadian Imperial Bank of Commerce, Bank of Montreal, Royal Bank of Canada etc. Considering a healthy balance sheet, healthy dividend pay-outs, efficient capital management, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 56.43 on 9 October 2020.

Nutrien

Nutrien (TSX: NTR) is the world's largest fertilizer producer by capacity. The group was created in 2018 as a result of the merger between PotashCorp and Agrium. The company produces the three main crop nutrients: nitrogen, potash and phosphate, although company's focus is potash, where it is the global leader in installed capacity with roughly 20% share. The company is also the largest agricultural retailer in the United States, selling fertilizers, crop chemicals, seeds, and services directly to farm customers through both its physical stores and online platforms.

Investment Rationales

• Largest global agri-retail network: The company had built a network of over 2,000 retail locations in seven countries and provide a wide range of products and services to help growers around the world feed the future.
• Financial Strength and Stability: Diverse earnings, strong free cash flow, healthy balance sheet has positioned the company to grow its business and return meaningful cash to shareholders. Company managed to return nearly USD 3.0 billion to shareholders in 2019 through dividends paid and share repurchases. At the end of Q2FY20, the group’s Debt to Equity ratio stood at ~ 0.54x, substantially lower than the industry average of 0.91x. The interest coverage ratio stood at 4.20x, which reflects the financial strength of the company to cover its debt liabilities easily.
• An income play:This Agri-chemical group has a track record of consistent dividend payment. Amid challenging operating conditions led by the outbreak of COVID-19 pandemic, the board of directors have declared a quarterly dividend of USD 0.45/share for the quarter ending on June 30,2020. This reflects the strong financial health of the company amid times when a vast majority of companies are restricting dividend payment to maintain adequate liquidity.

2Q FY20 Financial Highlights

Consolidated Results

Source: Company 

Quarterly Results

Source: Company

• In the second- quarter and first-half 2020 net earnings were lower than the same periods in 2019 primarily due to significantly lower crop nutrient prices. This was mostly offset by strong Retail revenue and gross margin growth, higher crop nutrient volume sales, solid operational results and the benefit of an asset retirement obligation change in estimate. COVID-19 had limited impact on their business in the period.
• For the same period discussed above Retail Ag Solutions delivered record EBITDA in the second quarter and the first half of 2020. First-half EBITDA was up 20 per cent Y-o-Y as a result of double-digit growth in revenue and gross margin, and EBITDA margins surpassing 10 per cent.
• The group reported that the global potash buying increased meaningfully following the signing of the China and India potash contracts. With strong demand in most key regions, many producers have announced that they are now sold out through September 2020, and Brazilian prices have rebounded by over US$30/mt from low values in the second quarter of this year. The company maintained its projection for 2020 global potash shipments between 65 and 67 million tonnes.

Sales by Market

Source: Company

Risk

The company is exposed to commodities price volatility risks such as volatility in the prices of potash, nitrogen, and phosphate. This could also have an impact on the group’s financials.

Price Performance

Source: Refinitiv (Thomson Reuters) 

Valuation Methodology (Illustrative): Price to Cash Flow valuation Metrics

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation

Nutrien recorded decent second quarter and first-half results backed by solid growth in Retail Ag Solutions earnings and excellent operational performance across Potash and Nitrogen business units. The group's competitive advantages were apparent in the second quarter, including the quality of its assets and impressive free cash flow generation, even at the bottom of the commodity cycle. Its digital platform continues to exceed expectations. Moreover, the group now expect to reach US$1 billion in online orders by the end of 2020. We have valued the stock using price to cash flow based valuation. We have considered Mosaic Co, CF Industries Holdings Inc, and Corteva Inc etc., as a peer group for the comparison purpose. Hence, based on the above rationale and valuation done, we have given a "Buy" recommendation at the closing price of CAD 53.80 on Oct 9, 2020.

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.