Emera Inc.

Emera Inc. (TSX: EMA) is a Canada-based energy and services company which invests in electricity generation, transmission and distribution and gas transmission and distribution. 

Key highlights

• An Income play:The group has a solid track record of dividend distribution, and the group’s dividend recorded a CAGR of 6% since 2000. Further, the group targets 4%-5% growth in its dividend distribution through to 2022. Moreover, at the last closing price, the stock was offering a healthy dividend yield of 4.73%, which looks impressive, considering the present economic scenario.

Source: Company

• Huge capex plans: The company plans to invest CAD 7.4 billion over the 2021-to-2023 period and another CAD 1.2 billion for opportunities under development over the same period, resulting in a forecasted rate base growth of 7.5% to 8.5% through to 2023. The investments will be across the portfolio in a renewable and cleaner generation, infrastructure modernization and customer-focused technologies.

Source: Company 

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the company posted operating revenues of CAD 1,163 million, decreased by CAD 136 million compared to CAD 1,299 million in Q3 2019. The group witnessed lower revenues under Florida electric utility segment due to lower clause revenues because of a decrease in fuel costs also the company had short revenues from their other electric utility segment where they sold Emera Maine in Q1 2020.
• Operating expenses posted by the company in Q3 2020, decreased by CAD 127 million to CAD 990 million as compared to CAD 1,117 million in Q3 2019, due to lower regulated fuel for generation and purchased power as a result of lower natural gas prices at the Florida electric utility segment.
• The net income attributable to common shareholders in Q3 2020, came to CAD 84 million as compared to CAD 55 million over the previous corresponding period, based on lower operating expenses as well as lower interest expense. 

Risks associated with investment

The company is exposed to many risk factors which alone or in a cumulative manner can affect the company’s operations and financial health. Some of the risks include the supply of and demand for crude oil, natural gas, natural gas liquids and renewable energy, prices of these commodities, exchange rates, inflation, interest rates. 

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock recommendation

We expect the Company to post much better numbers in the upcoming period supported by the revival in the economy, which has started generating the demand in the energy sector. Also, the temporary suspension of disconnections over non-payment trend has begun to reverse as normal disconnection processes resume, and the company do not see any significant customer defaults. The Company has a cumulative credit facility of CAD 3.3 billion along with a cash balance of CAD 335 million as on September 30, which seems sufficient to meet the near-term requirement. Therefore, based on the above rationales and valuation, we have given a “HOLD” rating at the closing price of CAD 53.9.

We have considered TC Energy Corp, AltaGas Ltd, Enbridge Inc etc. as the peer group for the comparison. 

Source: Refinitiv (Thomson Reuters)

West Fraser Timber

West Fraser Timber (TSX: WFT) is a softwood lumber company that also produces wood panels and pulp products. The company is active throughout North America, with lumber mills in British Columbia, Alberta, and the Southeastern United States.

Key highlights 

• Acquisition of Norbord: On November 19, 2020, West Fraser Timber Co. Ltd. (TSX: WFT) and Norbord Inc. (TSX: OSB) announced that they had entered a strategic business combination under which West Fraser will acquire all the outstanding common shares of Norbord, the world's largest OSB producer, in an all-stock transaction valued at approximately CAD 4.0 billion.

• Merger synergies to enhance cost leadership: The companies are already leaders on costs and Adjusted EBITDA margins in their respective segments, and the transaction is expected to improve that performance through meaningful synergies of up to CAD 80 million annually from fibre supply chain simplification, shared purchasing programs, transportation optimization, leveraging technology to improve reliability and productivity, and more efficient capital allocation. These synergies are expected to be achieved within two years of closing

• Healthy liquidity: The company reported liquidity of CAD 1,346 million as on 30^th September 2020, at the highest level since 2017. Meanwhile, the company has repaid a revolving credit facility during the reported quarter, which is impressive. Furthermore, the next maturity date for its revolving credit will be around the second half of FY22, which would help in maintaining the liquidity levels.

Source: Company

Financial overview of Q3 2020 (in millions of Canadian dollars)

Source: Company 

• In Q3 2020, the Company reported sales of CAD 1,690 million, increased by 42% as compared to CAD 1,190 million in the previous corresponding period. The rise in sales was primarily due to an increase in lumber prices and higher SPY volumes.
• Operating earnings in Q3 2020 has shown a turnaround and stood at CAD 487 million as compared to a loss of CAD 54 million in pcp. The reasons for this turnaround were higher sales and low cost of product sold.
• The Company reported a net income of CAD 350 million in Q3 2020, as compared to a loss of CAD 45 million in Q3 2019. 

Risks associated with investments

International lumber prices are trading at a historical peak, which might lead to a decline in US home construction due to rising cost, and subsequently lead to a lower demand scenario, affecting the total shipment volume.

Valuation Methodology (Illustrative): Price to Earnings 

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

Stock recommendation

The Company’s lumber and plywood facilities are operating near its full capacity to meet market demand. In the reported quarter the Company witnessed strong demand for lumber and plywood products, resulting in higher product prices. Repair and renovation activity and related demand also continued to trend positively. We feel that the housing market indicators, including new home starts, available for sale inventory, and mortgage rates would support the healthy demand for wood products. Despite recent volatility, the longer-term outlook for growth in wood products consumption appears favourable. The Company has also added a healthy cash flow generating OSB business to its existing portfolio. We feel that with increased scale, and diversity across products and end uses, geographies, and markets would firmly establish West Fraser as a leader in the global wood products industry. Therefore, based on the above rationale and valuation done using the above methodology, we have given a “Hold” rating at the closing price of CAD 82.06 December 22, 2020. We have considered Canfor Pulp Products Inc, Western Forest Products Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Primo Water Corporation

Primo Water Corporation (TSX: PRMW), operates as a pure-play water provider through its recent acquisition of the legacy Primo business by Cott. The firm's water solutions ecosystem is anchored by an assortment of water dispensers and its water direct business.

Management Updates:

The company recently announced the appointment of Jon Kathol as its Vice President of Investor Relations.

Key Updates:

• Springwater source certified from AWS program: The company announced that Primo Water North America, its wholly owned subsidiary is the first company to have a spring water source certified under the Alliance for Water Stewardship (AWS) program. The Management indicated that the company is in the process of certifying its Wekiva Spring site in Florida and would intend to begin the certification process for Georgia and Arkansas spring water sources in FY21. We believe the above certification program would help the company toward more sustainable resource management.
• Focus on Marketing: The company would enhance its Geographical presence across Canada and would mark its presence in Europe, which is a key positive. Moreover, the company would develop a web-based portal for multilocation customer adoption. Furthermore, the corporation would also focus on SEO to gain and maintain the first position in all major search engines.

Q3FY20 Financial Highlights:

• PRMW declared its quarterly results, wherein the company reported revenue of USD 517.5 million, higher than USD 472.1 million in the previous corresponding period (pcp). The increase was aided by the positive impact from the legacy Primo acquisition, while a lower revenue from our Water Direct commercial customer base stood as a drag.
• Gross profit stood at USD 304.1 million, as compared to USD 286.3 million in Q3FY19, which was primarily attributable by a higher income, partially offset by a higher cost of sales.
• Operating income was reported at USD 41.3 million, slightly higher than USD 38.4 million in the previous corresponding period.
• The company reported net income at USD 22 million, significantly higher than USD 10.1 million, driven by a higher operating income and the other income.
• The company reported cash and cash equivalent of USD 161.9 million, while total assets stood at USD 3,660.9 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to the ongoing pandemic coupled with changing consumer preferences, the group might witness a slide in Water Direct commercial customer base.

Valuation Methodology (Illustrative): Price to Earnings based

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

Stock Recommendation:

The company would capitalize on trends and styles consumers preferences, such as water enhancements, countertop and under-the-sink filtration, and IoT capabilities, and would focus on leveraging its current relationships with factories in order to grow its customer base. 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 Rollins Inc, Terminix Global Holdings Inc etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 20.20 on December 22, 2020.

PRMW Daily Technical 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.