Canadian Tire Corporation

Canadian Tire Corporation (TSX: CTC.A) sells home goods, sporting equipment, apparel, footwear, automotive parts and accessories, and vehicle fuel through more than 1,750-store network of the company, dealer, and franchisee-operated locations across Canada. Apart from the namesake banner, stores operate primarily under the Mark's, SportChek, Party City, Atmosphere, and PartSource monikers. 

Key Highlights:

• Gradual Recovery: Amidst the ongoing restrictions, on account of the COVID 19 pandemic, the group’s stores operated fully in the month of April 2021. The month of January and February 2021 were impacted due to strict norms imposed by the Government. We expect the company’s performance to improve further as it would be operating at full store strength.                       

Source: Company Presentation

• Consistent Growth in Dividend: Over the years, the company has reported a stable growth in its dividend distribution, backed by resilient operations. Notably, dividend distribution grew at a CAGR of ~18.4% from 2010 to 2020.

Q1FY21 Financial Highlights:

• The group announced its quarterly results, wherein the group posted revenue of CAD 3,322.9 million, reflecting a growth of 16.7% on y-o-y basis. The increase was driven by 19.2% y-o-y growth in the comparable sales, supported by double-digit growth across 60% of product categories.
• Gross profit was reported 26.3% y-o-y higher at CAD 1,186.4 million, supported by higher revenue.
• Income before income taxes stood at CAD 254.5 million, as compared to CAD 2.9 million in the previous corresponding period (pcp). The growth was mainly supported by higher gross profit coupled with lower net finance costs, partially offset by an increase in the selling, general and administrative expenses.
• The company posted a net income of CAD 186.4 million, reflecting a solid growth from CAD 12.2 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Further restriction from the government would result in a lower retail demand, which might hinder the company’s topline and cash flows.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The eCommerce segment has delivered encouraging results in the recent past, while eCommerce sales surged 257% on y-o-y basis in Q1FY21 across all retail banners. Moreover, the group reported solid growth of 60% on y-o-y basis in the digital traffic across all the banners. Additionally, the company’s triangle rewards loyalty program continued to attract new customers and hence its accounted for ~56% of the total retail sales. Notably, the group saw a 15% surge in the average spend of the active members, which is a key positive. We have valued the stock using the Price to Earnings-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Empire Company Ltd, Loblaw Companies Ltd and George Weston Ltd etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 194.73 on June 28, 2021.

One-Year Technical Price Chart (as on June 28, 2021). Analysis by Kalkine Group 

Toromont Industries Ltd

Toromont Industries Ltd (TSX: TIH) is a Canadian industrial company, which operates through two segments, namely, Equipment Group and CIMCO. Equipment Group derives a major part of the revenue, including a Caterpillar dealership and rental operation of construction equipment.

Key Highlights:

• Cash from Operations turns positive: In Q1FY21, the corporation recorded solid growth in its cash flows, supported by higher net earnings and improved working capital management. Notably, the group reported cash from operating activities at CAD 50.883 million, as compared to cash used in operating activities amounting to CAD 40.885 million a year ago.

• Decline in Net Debt to Market Capitalization: A decline in borrowings has resulted in an impressive net debt to market capitalization for the company. In Q1FY21, net debt to market capitalization stood at 2%, which indicates that the company can repay its borrowings easily, which is a key positive.                                                   

Source: Company Presentation

• Increase in dividend payment amidst turbulent times: The group has increased its dividend payment in Q1FY21 to CAD 25.560 million, higher than CAD 22.139 million in Q1FY20. The above is impressive as most of the companies are reducing their dividend distribution in order to retain their liquidity levels.

Q1FY21 Financial Highlights:

• TIH announced its quarterly result, wherein the group posted its revenue of CAD 806.238 million, significantly higher than CAD 715.459 million in the previous corresponding period (pcp). The growth was primarily aided by an 11% y-o-y growth from the Equipment group at CAD 727.3 million combined with a 37% y-o-y surge in revenue from the CIMCO segment to CAD 78.9 million.
• Gross profit was recorded at CAD 187.378 million, higher than CAD 170.858 million in Q1FY20, supported by elevated income, partially offset by an increase in the cost of goods sold (CAD 618.860 million v/s CAD 544.601 million in pcp).
• Operating income came at CAD 70.216 million, surged from CAD 55.241 million in pcp, supported by higher gross profit, while an increase in selling and administrative expenses (CAD 117.162 million v/s CAD 115.617 million in pcp) acted as a drag.
• Net earnings of the company were recorded at CAD 47.956 million, v/s CAD 37.396 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Various provinces across Canada have begun to ease restrictions from February 2021 onwards, but the growing emergence of COVID-19 variants due to higher communicability and higher health risks might lead to a further lockdown of construction activities, which might lead to lower business activity.

Valuation Methodology (Illustrative): Price to Earnings based

Stock Recommendation:

The group maintained a decent liquidity level of CAD 1,234 million, which includes CAD 614 million of cash, CAD 470 million of credit facility and CAD 150 million of accordion. This seems sufficient to fund its working capital requirement and capital investments. The group is expanding its presence across the Rental Equipment, Product Support, telematics and digital capabilities and is focusing on operational excellence through disciplined expense management, development of human capital and prudent investment in IT capabilities. This is expected to improve the company’s business prospects would further support its cash flows. We have valued the stock using the Price to Earnings-based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered industry (Machinery, tools, heavy vehicles, trains & ships) mean on an NTM basis. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 106.28 on June 28, 2021.

One-Year Technical Price Chart (as on June 28, 2021). Analysis by Kalkine Group

Element Fleet Management Corp.

Element Fleet Management Corp. (TSX: EFN) is a leading fleet management company, which provides world-class fleet management services that empower extraordinary results across the total fleet lifecycle.

Key Highlights:

• Robust Margin: The company showcased a strong margin profile and reported a higher margin than the industry median. Gross margin and EBITDA margin stood at 84% and 58.9%, respectively, in Q1FY21, as compared to the industry median of 55.9% and 29.8%, respectively. The company reported its net margin at 23.5% in Q1FY21, significantly higher than the industry median of 11.2%.
• Improving Financial metrics: Over the years, the company has successfully reduced its total debt and has increased its Asset Under Management (AUM). Notably, since Q1FY18, the company has reduced ~CAD 4.3 billion of its debt, which is encouraging. Moreover, an increase in AUM also indicates higher business prospects                 

Debt and equity compared to assets under management (Source: Company Presentation)

Q1FY21 Financial Highlights:

• EFN announced its quarterly result, wherein the company posted net revenue of CAD 598 million, slightly higher than CAD 247.239 million in Q1FY20. The increase was supported by higher net finance revenue, partially offset by lower net service income.
• Operating expenses stood significantly lower at CAD 117.409 million, as compared to CAD 125.909 million in Q1FY20. The decline was primarily due to lower general and administrative expenses and a significant decline in expense related to amortization of convertible debenture discount.
• Net income for the period surged to CAD 95.529 million compared to CAD 79.358 million in pcp.                                                                                                                            

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Extended restriction due to the arrival of the third wave of virus would lead to a decline in the estimated value of the collateral loans and leases, which might impact the company’s overall performance.

Valuation Methodology (Illustrative): Price to Book Value

Stock Recommendation:

The company reported strong growth in cash from operations of CAD 920.178 million in Q1FY21compared to CAD 308.392 million in pcp, supported by a higher net income coupled with improved working capital management. Moreover, the group paid a higher dividend of CAD 36.735 million in Q1FY21, compared to CAD 25.775 million in pcp. We have valued the stock using the P/BV based relative valuation method and have arrived at a single-digit upside (in percentage terms) upside. For the said purposes, we have considered peers like ECN Capital Corp, Canadian Western Bank etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 14.41 on June 28, 2021.

One-Year Technical Price Chart (as on June 28, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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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.