Element Fleet Management Corp.

Element Fleet Management (TSX: EFN) provides management services and financing for commercial vehicle and equipment fleets. The company's suite of fleet management services deals with acquisition and financing, to program management and remarketing.

Key Highlights:

• Management Update: Recently, the group reported the appointment of Frank Ruperto as Chief Financial Officer, after the departure of Vito Culmone from the above post. 

• Higher margins than Industry: EFN reported significantly higher margins than the industry median during Q3FY20. The company reported gross margin, EBITDA margin and a net margin of 80.0%, 54.5% and 17%, respectively, as compared to the industry median of 52.3%, 27.7% and 16%, respectively. Moreover, the operating margin stood at 21.2%, as compared to the industry median of 19.9%.

• Stable Cash Flows: Historically, the company reported consistent free cash flows, and stable adjusted EPS, backed by improved operating leverage and resilient business operations, amidst the economic cycles. The company adapted purchasing power & data analytics to drive down the total cost of fleet operations to the clients.

Source: Company Reports

Q3FY20 Financial Highlights

• EFN declared its quarterly results, wherein the group reported net revenue of CAD 243.252 million, versus CAD 245.796 million in the previous corresponding period (pcp). The decline was primarily driven by lower income from syndication revenue (CAD 15.246 million versus CAD 23.084 million in pcp), partially supported by improved performance from net financing and servicing income.
• Adjusted operating income stood at CAD 128.985 million, slightly higher than CAD 650 million in Q3FY19.
• The corporation posted a net income of CAD 70.778 million, slightly higher from CAD 70.145 million, in Q3FY19.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: Continued restrictions due to COVID 19 might dampen the company’s overall income and might lead to a lower estimated value of the collateral loans and leases and might impact the overall performance of the company.

Valuation Methodology (Illustrative): Price to Book Value

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

Stock Recommendation:

The group has strong clientele and portfolio includes many investment grade clients belong to Fortune 500 companies, while the company recorded ~98% historical average annual retention rate, which is encouraging. Despite, the ongoing sluggish scenario, the company has reduced its debt component to CAD 10.980 million in Q3FY20, from CAD 12.006 million in Q2FY20, which seems impressive. We have valued the stock using P/BV based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Intact Financial Corp, Canadian Western Bank etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 12.44 on February 3, 2021.

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

Champion Iron Ltd

Champion Iron Ltd (TSX: CIA) is engaged in the exploration and development of iron ore properties in Quebec, Canada. The company's operating segment include Mine Site, Exploration and Evaluation, and Corporate.

Key Updates:

• Technical Indicators are showing bullish trend: The stock of CIA closed above the long -term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend. Moreover, the stock reported a handsome gain in the recent past, and soared ~189% and ~137%, respectively in the last nine months and one year, respectively driven by an elevated realization price from iron ore. Strong momentum of the iron ore prices has further supported the company’s margins.                     

(Source: Refinitiv, Thomson Reuters)

• Robust profitability margins: The group reported strong operational efficiency and posted gross margin, and operating margin at 65.1%, and 61.1%, respectively in Q3FY21, considerably higher than the industry median of 10.3%, and 6.7%, respectively. Meanwhile, during Q3FY20, the corporation reported a net margin of 36.6%, significantly higher than the industry median of 3.3%.

• Ample liquidity: The company has increased its credit facility from USD 200 million to USD 400 million, which seems sufficient to sail through the pandemic, if needed. Meanwhile, the first repayment has been postponed to June 30, 2022, from June 30, 2021. The above would help the company to retain its liquidity levels.

Q3FY21 Financial Highlights:

• CIA announced its quarterly results, wherein the group posted revenue of CAD 329.545 million, significantly higher than CAD 171.100 million in the previous corresponding period (pcp). The increase was driven by 39% y-o-y growth in the gross average realized selling price at CAD 194.8 per dmt sold.
• Gross profit soared to CAD 212.435 million from CAD 62.350 million in Q3FY20, supported by strong revenue growth, while a slightly higher cost of sales remained a drag. The group reported solid EBITDA margin of 64%, as compared to 34% in pcp.
• The group reported operating income at CAD 203.300 million, considerably higher than CAD 53.279 million in pcp. The group reported a higher general and administrative expenses (CAD 5.218 million versus CAD 4.766 million in pcp), and higher net finance costs (CAD 8.648 million versus CAD 4.718 million in pcp).
• The group reported net income of CAD 120.771 million, as compared to CAD 30.184 million in Q3FY19.
• CIA reported Cash and cash equivalents of CAD 489.640 million, while total assets were reported at CAD 1,265.122 million.

Q3FY21 Income Statement Highlights (Source: Company Reports) 

Risks: The group performance is correlated to the price and demand dynamics of iron ore. Volatility in the international iron ore prices and change in demand dynamics would affect the group’s financial performance.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendations:

The group reported a higher cash flow from operations at CAD 388.899 million in Q3FY21, compared to CAD 224.953 million a year ago, supported by higher net earnings. We expect the demand for iron ore to remain high following the higher spending on infrastructure and the group is likely to benefit from this. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Ero Copper Corp, Capstone Mining Corp and Altius Minerals Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 5.03 on February 03, 2021.

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

Polaris Infrastructure Inc.

Polaris Infrastructure Inc. (TSX: PFI), is a Canada-based company, which is engaged in the acquisition, development, and operation of renewable energy projects in Latin America. It operates energy projects in Central and South America, which includes both Geothermal and Hydroelectric energy projects.

Key Highlights

• Extended “MOU” for ten MW run-of-river hydro project in Panama: Recently, the company announced that it has extended the period of exclusivity to June 30, 2021 for the Memorandum of Understanding (“MOU”) signed in 2020 to acquire the owner of a Panama-based 10 MW run-of-river hydro project called Chuspa from Navitas Holdings, Inc. of Panama. The Company was unable to commence the construction of the Project in 2020, due to restrictions on account of COVID-19. Now, the management is fully optimistic that with this extension they can mobilize in the second quarter of this year.
• Steady dividend distribution: The company has a strong history of dividend payment, which establishes the fact that the company’s business is resilient in nature and has reported stable cash flows over the years. The group paid a quarterly dividend of USD 0.15 per outstanding common share on 30, November 2020. Moreover, at the last closing price, the stock was offering a dividend yield of 3.67%, which is decent amid low interest rate environment.
• Improved liquidity and working capital: In Q3 2020, the company increased the total cash balance to USD 58.6 million, as against USD 32.6 million as on December 31, 2019, while the net increase in cash of USD 10.3 million was registered in Q3 2020, against a decrease of USD 15.4 million in Q3 2019. The working capital stood at USD 43.7 million, as against USD 13.6 million.

Source: Company 

Financial Overview of Q3 2020 (in USD Thousands)

Source: Company

• In Q3 2020, Revenue posted by the company decreased by USD 0.5 million to USD 17.1 million, compared to USD 17.6 million in Q3 2019, mainly due to decrease in production at the San Jacinto facility and Canchayllo facility.
• The company posted an operating income of USD 6.5 million in Q3 2020, as against USD 8.6 million in the previous corresponding period. The reasons behind the low operating income were high direct cost, increased depreciation, and high G&A expenses as compared to Q3 2019.
• In Q3 2020, the group managed to post net earnings of USD 1.3 million, as against USD 2.7 million, primarily due to higher operating expenses, partially offset by lower interest expense as compared to Q3 2019.

Risk associated with investment

Risk related to environment and climate change could hamper the operations of the group. The market conditions in which the company operates are full of changes and might impact the operational performance and reduce the group's financial performance. Other critical risks associated with the group are interest rates, liquidity, foreign exchange, and any change in regulations and government policies could affect the group's overall business.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock recommendation

The Utility industry continues to have a challenging outlook as the COVID-19 pandemic has resulted in significant imbalances. We believe, the trend is likely to improve in the coming days as the industry is expected to return to normalcy with a gradual recovery in the economy, leading to higher demand. Recently the Company extended its “MOU” for ten MW run-of-river hydro project in Panama. The Company was unable to commence the construction of this project in 2020, due to restrictions raised from Covid-19, but now the management is entirely optimistic that with this extension they can mobilize in the second quarter of this year. Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 21.48 on February 3, 2021. We have considered Boralex Inc, Northland Power Inc, Capital Power Corp, 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.