Waste Connections Inc.

Waste Connections Inc. (TSX: WCN) is the third-largest integrated provider of traditional solid waste and recycling services in North America, which operates 86 active landfills, 124 transfer stations, and 66 recycling operations. The firm serves residential, commercial, industrial, and energy end markets.

Key Highlights

• Guidance for higher numbers in 2021: On the back of reopening and recovery in the economy, the management expects some outstanding numbers for 2021, where they expect revenue to be approximately USD 5.80 billion, Adjusted EBITDA would be approximately USD 1.80 billion, or about 31.0% of revenue and the net income of approximately USD 669 million. Furthermore, adjusted free cash flow is estimated to be at least USD 950 million, or 16.4% of revenue.

• Consistent adjusted free cash flow: The company has a resilient business model and reported stable free cash flows in the recent past, which is a key positive. Although in 2020, adjusted free cash flow decreased slightly by USD 74.9 million to USD 841.9 million, against USD 916.8 million in 2019. Adjusted free cash flow as a percentage of revenues was 15.5% in 2020, against 17.0% in 2019. Furthermore, the company expect to improve this ratio to 16.4% in 2021 with double-digit growth in adjusted free cash flow.

Source: Company

• Industry beating margins: The Company outperformed the industry margin profile, which is a key positive. In FY 2020, the group reported EBITDA margin, operating margin, and a net margin of 30.1%, 7.6% and 3.7%, respectively, which stood higher than the industry median of 15.7%, 7.3% and 2.8%, respectively. 

Financial overview of FY 2020 (In thousands of U.S Dollars)

Source: Company

• For FY 2020, the company recorded revenue of USD 5.45 billion, compared to USD 5.39 billion in the previous corresponding period. An increase of 1.1% in revenue was mainly due acquisitions, partially offset by the low performance of E&P segment due to economic disruptions and reduced service due to COVID-19.

• Operating income for the reported period stood at USD 412.42 million, compared to USD 837.78 million in FY 2019. Impairment cost worth USD 466.72 million in FY2020, was the main reason behind the fall in operating income.

• Net income attributable to Waste Connections stood at USD 204.68 million, against USD 566.84 million in the previous corresponding period. 

Risks associated with investment

A prolonged lockdown or any other containment measures announced by the government would result in a tepid volume from the commercial segment. As a result, the company’s performance would impact adversely.

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock recommendation 

During Q4 2020, the impacts on the company’s business related to the COVID-19 pandemic continued to moderate compared to prior periods, despite the reinstatement of shutdowns and other activity restrictions in many markets. In some markets, the company witnessed improving commercial service requirements and landfill tons while the commercial volume recovery remained steady. Furthermore, we expect the volume of the solid waste, commercial collection and E&P to improve in the coming quarters, as most industrial and manufacturing activities are resuming gradually. The company had highlighted some key 2021 numbers where it expects to clock a revenue of approximately USD 5.80 billion and net income of approximately USD 669 million. Moreover, they expect double-digit growth in adjusted free cash flow in 2021. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock at the closing price of CAD 129 on March 15, 2021. We have considered GFL Environmental Inc, Waste Management Inc, Rollins Inc, etc. as the peer group for the comparison.

1-Year Price Chart (as on March 15, 2021). Source: Refinitiv (Thomson Reuters)

George Weston Ltd

George Weston Ltd (TSX: WN) is a holding company that operates through three subsidiaries encompassing retail, real estate, and consumer goods. The first is Loblaw, the largest grocer in Canada, in which it has a 52% controlling stake. The second is Choice Properties, an open-ended real estate investment trust, where George Weston's ownership sits close to 63%. The third is Weston Foods, a North American bakery, which the firm wholly owns.

Key Highlights 

• Tremendous increase in free cash flows: For FY2020, the company reported cash flows from operating activities at CAD 5,521 million, an increase of CAD 966 million compared to 2019. The increase was primarily due to a lower credit card receivable because of reduced customer spending due to COVID-19, lower income taxes paid and higher cash earnings. It also recorded a free cash flow of CAD 2,128 million, increased by CAD 761 million against the previous corresponding period.

Source: Company

• Robust performance from the retail segment: The company derives significant revenue from the retail part, and it increased by CAD 4,677 million, or 9.7% to CAD 52,714 million, compared to the same period in 2019. The increase was primarily due to positive same-store sales growth and a net increase in retail square footage. Food retail same-store sales growth was 8.6% for FY2020. The company also witnessed a rise in average article price due to the change in sales mix. We believe this sales mix and retail participation to improve further.

• Ample amount of Liquidity:The company reported the available liquidity of CAD 1 billion for the Loblaw company, while Choice Properties reported CAD 1.5 billion of available liquidity under its committed credit facility. Along with this, it also holds a cash balance of CAD 3.23 billion, which seems sufficient to mitigate the current challenging operating environment. 

Financial overview of FY2020

Source: Company

• For FY 2020, the Company reported revenue of CAD 54.71 billion, up 9.2% compared to CAD 50.11 billion in the previous corresponding period. The increase was mainly due to growth in Loblaw retail, partially offset by the decline in Weston Foods' sales driven by COVID-19.

• In the reported period, the Company's operating income stood at CAD 2.89 Billion, against CAD 2.96 billion in pcp. The decrease of CAD 70 million was mainly attributable to the unfavourable year-over-year net impact of adjusting items totalling CAD 107 million.

• The operating margin fell to 5.3%, from the 5.9% reported in FY 2019. The decline in operating margin was mainly driven by the higher cost of inventories and higher SG&A expenses.

• The Company's net income stood at CAD 1.58 billion, increased by 92.2% compared to CAD 823 million in pcp. The net income improved primarily due to lower net interest expense. 

Risks associated with investment

The performance of the Company's business is prone to several risks which could affect income and liquidity. Lower consumer spending, coupled with a decline in the traffic, might act as a drag for the Company, which would dampen the Company's overall performance. 

Valuation Methodology (Illustrative): Price to Earnings 

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

Stock recommendation

The company received significant support from Loblaw, which delivered strong results despite the COVID-19 pandemic. It witnessed positive same-store sales growth and a net increase in retail square footage. Moreover, the food retail same-store sales registered a growth of 8.6% for FY2020. We believe this positive momentum to continue as the customers began to visit restaurants and food stores more frequently. Furthermore, it holds robust liquidity and free cash flows, which we believe are sufficient to mitigate the current challenging operating environment. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 100.55 on March 15, 2021. We have considered Empire Company Ltd, Saputo Inc, Alimentation Couche-Tard Inc etc. as the peer group for comparison.

Source: Refinitiv (Thomson Reuters)

Morguard Corp

Morguard Corp (TSX: MRC), is a real estate company that acquires, owns, and develops commercial, multi-unit residential and hotel real estate properties in Canada and the United States.

Key highlights

• Improved rent collections: In Q4 2020, the group witnessed stable rent collection at 94.5%, compared to 95% in Q3 2020. We believe the rent collection to remain stable or improve, supported by the improved retail and office occupancy rates. Rent collections from all commercial asset classes have been strong with approximately 95% collected during the third and fourth quarters of 2020, compared to 86.6% collected during the second quarter of 2020.\

Source: Company

• Steady occupancy levels: During the year, occupancy was consistent across all commercial and residential asset classes, supporting the Company's business objective of generating stable and increasing cash flow through its diversified portfolio of real estate assets. The group’s occupancy rate in Q4 2020, remained above a healthy mark of 90%, looks impressive.

Source: Company

• Ample liquidity: The company is maintaining a decent liquidity of approximately CAD 564 million, comprised of CAD 142 million in cash and CAD 422 million available under its revolving credit facilities, which seems sufficient for the group to fund its working capital.

Financial overview of FY 2020

Source: Company

• In FY 2020, the company reported a decline in total revenue by 11.7% to CAD 986.37 million, against 1117.5 million in FY2019. The decrease in revenue was primarily due to lower performance from the hotel properties, which generated CAD 98.05 million in the reported quarter against CAD 245.28 million in pcp, mainly due to Covid-19.
• The group's net operating income in FY 2020 decreased by CAD 65.0 million, or 11.7%, to CAD 491.25 million, against CAD 556.18 million in pcp. The decline was primarily due to lower NOI from the hotel portfolio and higher bad debt expense.
• The group's net loss stood at CAD 250 million, against a profit of CAD 188.80 million in the previous corresponding period. The net loss was primarily due to a higher net fair value loss of CAD 501.7 million, a higher provision for impairment of CAD 37.04 million and a decrease in NOI. 

Risks associated with investment

The revenue and operating results of the Company depend significantly on the occupancy levels and rent collection, any fluctuations in occupancy levels and business volumes.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

Gradually the economy has started the revival process, as the improvement signs are now visible. The job market is strengthening slowly, which depicts the return of consumer and investors’ confidence. The residential segment of the group is continuously performing well and reporting stable numbers. Furthermore, we believe the segment would continue to improve as the per capita income would improve. The company has a diversified, resilient business model and reports impressive rent collection at the rate of 94.5% in Q4 2020. Moreover, the rent collections from all commercial asset classes have been substantial, with approximately 95% collected during the third and fourth quarters of 2020, compared to 86.6% collected during the second quarter of 2020. Therefore, based on the above rationales and valuation, we recommend a “Buy” rating at the closing price of CAD 115.98 March 15, 2021. We have considered Crombie Real Estate Investment Trust, Mainstreet Equity Corp, NorthWest Healthcare Properties REIT etc. as the peer group for the comparison.

Price Chart. 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.