GFL Environmental Inc

GFL Environmental Inc (TSX: GFL) is a diversified environmental services company in North America, offering non-hazardous solid waste management, infrastructure & soil remediation, and liquid waste management services throughout Canada and in 27 states in the United States.

Key highlights

• Acquisitions paying rewards:The acquisitions made by the company in the past are paying handsome reward. As a result, the company posted healthy growth in its total revenue in Q3 2020, which increased by 15.4%. On October 1, 2020, the company made another acquisition in the form of WCA Waste Corporation and its subsidiaries for aggregate consideration of CAD 1,616.7 million. The purchase price for the acquisition was partially funded with the net proceeds of the 3.750% 2025, Secured Notes and the private placement of USD 600.0 million.

Source: Company

• Increasing Cash flows: Cash flow from operating activities saw an increment of 214.2% to CAD 256.7 million in Q3 2020 compared to Q3 2019. This increase was predominantly attributable to improved working capital, an increase in Adjusted EBITDA and reduced interest expense during the period.

Source: Company

• Healthy balance sheet:The company’s balance sheet remained healthy with a cash balance of more than CAD 1.8 billion as on September 30, 2020; reduced long-term debts to CAD 6 billion, compared to CAD 7.5 billion as on December 31, 2019.

Financial overview of Q3 2020 (In millions of CAD dollars)

Source: Company

• In Q3 2020, the company’s revenue increased by CAD 138.0 million to CAD 1.03 billion compared to CAD 898 million in the previous corresponding period. The increase was primarily attributable to the revenues generated from the acquisitions.
• Cost of sales as a % to revenue in Q3 2020 came down to 88% at CAD 909.5 million, as compared to 90% at CAD 807.8 million in Q2 2020.
• The company posted a net loss of CAD 114.7 million in the reported quarter, as compared to a loss of 110 million, partially offset by lower interest and other finance costs.

Risks associated with investment

Public health outbreaks, epidemics or pandemics, such as the COVID-19 pandemic, is not the only risk associated with the business which could adversely impact the business of the company. Other risks are also there such as increases in labour, disposal, and related transportation costs; fuel supply and fuel price fluctuations, etc.

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The Company experienced lower volume in the liquid waste business resulting from the temporary suspension of specific customers operations and deferral of capital expenditures to mitigate the impact of COVID-19. The improving macro conditions would be favourable for the Company as the industries have started working on a regular course taking health precautions. The recent acquisitions have already begun giving healthy signals in terms of revenues. With a strong balance sheet and available liquidity, the group is well-positioned to continue to pursue strategic and accretive opportunities. Based on the rationales discussed above and valuation, we have given a “Hold” rating at the closing price of CAD 35.44 as on December 18, 2020. We have considered Clean Harbors Inc, Republic Services Inc, Waste Connections Inc, Casella Waste Systems Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Canadian National Railway Company

Canadian National Railway Company (TSX: CNR) is engaged in the transportation business and transports more than 300 million tons of natural resources, manufactured products, and finished goods throughout North America every year.

Key Highlights:

• Logistics Terminal in Alabama: Recently, the company reported collaborations with Alabama Export Railroad, and Ray-Mont Logistics for launching the first phase of a new, innovative, high-tech logistics park in Mobile, AL., which is expected to open in 2021. Through the above terminal, the company would include bagging lines with an annual capacity of 25,000 Twenty-Foot Equivalent Units. The terminal is strategically located in the unique tri-coastal network, which would offer extensive export capacity and would provide easy access to Asian, Latin American, and European markets without warehousing costs or requiring double handling. 

• Elevated Grain Production in Canada: Over the years, Canada has reported a solid production growth in the grains. Thus, the overall industry witnessed an impressive capital investment within the grain supply chain capabilities. The company serves 70% of new high-throughput unit train grain elevators since 2015.                      

Source: Company Presentations

Q3FY20 Financial Highlights:

• CNR announced its quarterly results, wherein the company posted revenues of CAD 3,409 million, lower than CAD 3,830 million in the previous corresponding period (pcp). The decrease in revenues was majorly attributed to a lower volume across most commodity groups due to the ongoing effects of the COVID-19 pandemic combined with lower applicable fuel surcharge rates, partly offset by freight rate increases as well as increased shipments of Canadian grain.
• Freight revenue per RTM stood at 5.77 cents, as compared to 5.95 cents in Q3FY19, while freight revenue per carload declined to CAD 2,256, against CAD 2,363 in pcp.

Source: Company Reports

• Total operating expenses stood lower at CAD 2,043 million, as compared to CAD 2,217 million in Q3FY19, due to a lower labour and fringe benefits, a decline in purchased services and material and fuel costs, partially offset by an increase in depreciation and amortization costs and equipment rents.
• The company’s net income stood at CAD 985 million, as compared to CAD 1,195 million in the previous corresponding period.
• The company reported cash and cash equivalents of CAD 285 million, while total assets stood at CAD 45,158 million.                        

Q3FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology (Illustrative): P/E multiple based

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

The operation of the group is resilient in nature and immune to the economic cycle. Recently, the company reported the launch of its new inland distribution terminal in New Richmond, WI. With the above facility, the company would include an automotive compound for finished vehicles, and an intermodal terminal to serve intermodal shippers and receivers in the metropolitan area of Minneapolis and Saint Paul, MN. We expect the above facility would offer important access to the containers for agricultural exporters and would cater to the demand in Europe and Asia. The stock closed above the long-term support levels of 100-days, 150-days, 200-days simple moving average (SMA), indicating a bullish trend. We have valued the stock using Price to Earnings based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Canadian Pacific Railway Ltd, Union Pacific Corp. Norfolk Southern Corp etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 141.54 on December 18, 2020.

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

Parkland Corporation

Parkland Corporation (TSX: PKI) is an independent supplier and marketer of fuel and petroleum products and a leading convenience store operator. Parkland services customers across Canada, the United States, the Caribbean region, through three channels: Retail, Commercial and Wholesale.

Key highlights

• Higher capex plans: The management is optimistic on its diversified & resilient business model and has raised its capital expenditure guidance, by CAD 50 million to CAD 325 million for 2020, supported by the strong cash flow generation.

Source: Company

• Diversified & resilient business model:The Company is in a sweet position, based on its diversified and resilient business model which provides stability and multiple avenues for growth, also helped them to respond quickly and prudently to COVID-19, to maintain its operational flexibility. As a result, the company reported decent Adjusted EBITDA and distributable cash flows complemented by a strong balance sheet.

Source: Company

• Maintaining Healthy Liquidity:  As on September 30, 2020, the company had cash and cash equivalents worth CAD 356 million and Unused credit facilities of CAD 1.2 billion. The current liquidity position seems sufficient enough to meet the near-term requirements.

Source: Company

Financial Overview of Q3 2020

Source: Company

• In Q3 2020, the company reported revenue of CAD 3.5 billion, as compared to CAD 4.6 billion in the previous corresponding period, primarily due to volume declines because of lower product demand on account of COVID-19 and lower oil and gas industry activity.

• Adjusted EBITDA stood at CAD 338 million, an increase of 12% in Q3 2020, compared to Q3 2019. Reasons behind the rise in Adjusted EBITDA were healthy cost controls, geographical diversification and the strong performance shown by convenience stores in Canada, achieving 10.7% same-store sales growth in the reported quarter.

• Net earnings reported by the company in Q3 2020 was CAD 91 million, an increase of CAD 65 million, as compared to CAD 26 million in the previous corresponding period. 

Risk in investments

The company is exposed to many risks, including general economic, market and business conditions, including the duration and impact of the Covid-19 pandemic; ability to execute its business strategies, industry capacity, competitive action by the other companies, refining and marketing margins, and the ability of suppliers to meet commitments. 

Valuation Methodology (Illustrative): EV to EBITDA

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Despite COVID-19 restrictions and the closure of the tourism industry, which significantly impacted aviation and retail volumes, the International segment’s performance was sustained by geographical diversification, executing profitable supply initiatives, and implementing healthy cost controls. The convenience stores in Canada have shown resilience by achieving 10.7% same-store sales growth in Q3 2020. The company is focusing on expanding margins across its fuel and non-fuel categories. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 41.85 on December 18, 2020. We have considered Superior Plus Corp, Canadian Tire Corporation Ltd, Alimentation Couche-Tard Inc etc. as the peer group for the comparison.

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.