SNC-Lavalin Group Inc.

SNC-Lavalin Group Inc. (TSX: SNC) is a fully integrated professional services and project management firm that offers a wide range of services, including financing, consulting, engineering and construction, procurement, and operations and maintenance.

Key Updates:

• Banking new contracts: The company through its joint venture with NorthWind has been awarded the Western Federal Lands Highway Division (WFLHD) contract to execute project management and construction, engineering, and inspection (CEI) services throughout the Pacific Northwest till 2026. This has been awarded by the Eastern Federal Lands Highway Division (EFLHD). Moreover, the company would also continue to serve as prime consultant on a Central Federal Lands Highway Division (CFLHD) architecture, planning, design, and program management contract till 2024. This is likely to boost the company’s order book and revenue.

• Stable growth from the Engineering Services segment: In the first quarter of FY22, the company reported its revenue of CAD 1,138.2 million, jumped 8.4% on y-o-y driven by strong volume growth from the company’s core markets across the United Kingdom, the United States and Canada. Notably, backlog increased by 2.4% since Q4FY21 to CAD 3,861.1 million, with a strong pipeline of prospect. A higher backlog suggests a possible increase in the company’s upcoming sales.

• Decline in long-term debt: The company reported its long-term debt of CAD 1,357.1 million on March 31, 2022, against CAD 1,553.2 million on December 31, 2021, reflecting a slide of ~13. This is impressive and is expected to enhance the company’s overall financial flexibility.

Risk Associated with the Investment:

The company’s operation is directly co-related with the current economic scenario. Any slowdown in the overall economy might result to a decline in order book and hence a subsequent slide in revenue and cash flows.

Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• SNC announces its quarterly result, wherein the company posted a revenue from CAD 1,888.0 million v/s CAD 1,819.7 million in pcp. The growth was supported by a higher income from the Professional Services & Project Management (PS&PM) segment.
• The company reported increase in input costs, and posted higher direct costs of activities, corporate selling, general & administrative expenses, and a surge in restructuring & transformation costs. Hence, earnings before interest and taxes stood at CAD 51.4 million, declined from CAD 103.4 million in pcp.
• The company reported its net income of CAD 21.8 million v/s CAD 73.9 million in pcp. This was primarily due to lower EBIT as mentioned earlier coupled with higher income tax expenses, partially offset by lower financial expenses.
  

Valuation Methodology (Illustrative): EV to Sales based methodology

   Analysis by Kalkine Group

Stock Recommendation:

Despite the sluggish economic scenario, the company reported a higher revenue and a healthy backlog, which suggest a revival in the demand dynamics. Moreover, the company recently bagged prestigious order from the Eastern Federal Lands Highway Division (EFLHD) which is likely to boost the company’s upcoming operations. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Finning International Inc, IBI Group Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of SNC at the last closing price of CAD 25.55 on May 30, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 30, 2022). Source: REFINITIV, Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV

Technical Analysis Summary

goeasy Ltd.

goeasy Ltd., (TSX: GSY) is a Canada based company, which provides non-prime leasing and lending services through its easyhome, easyfinancial and LendCare brands. The Company offers a wide variety of financial products and services, which includes unsecured and secured instalment loans.

Key Highlights

• Strong loan origination and loan portfolio: The group’s loan originations stood at CAD 477 million in Q1 2022, up 75% compared to the CAD 272 million produced in the first quarter of 2021. The increase in loan originations led to organic growth in the loan portfolio of CAD 124 million, a record level of first quarter loan growth, resulting in a total gross consumer loan receivable portfolio of CAD 2.15 billion, up 69% from CAD 1.28 billion in the first quarter of 2021.

• Encouraging Long-term Guidance: For FY22, the company expects its gross consumer loan receivables in between CAD 2.4 to 2.6 billion, significantly higher than CAD 2.03 billion in FY20. Moreover, the management expects the momentum to continue in the coming years, which would subsequently support the company’s upcoming performances. Notably, total revenue in FY22 is expected in between CAD 0.97 billion to CAD 1.0 billion, which is significantly higher than CAD 826.7 million in FY21.

• Constant surge in dividend payment: Historically, the company reported a constantly higher dividend distribution, backed by stable cash flow generation. Recently, the group approved a quarterly dividend of CAD 0.91 per share payable on July 8, 2022, to the holders of common shares. Notably, from FY14 to FY22E, the company would report a 34.5% CAGR growth in the dividend distribution, which is encouraging.           

• Strong liquidity: Based on the cash on hand at the end of the quarter and the borrowing capacity under its recently amended revolving credit facilities, the company has approximately CAD 801 million in total funding capacity, which it estimates is sufficient to fund its organic growth through the second quarter of 2024.

Risk associated with the Business:

The company registered a higher bad debt of CAD 54.1 million in Q1 2022, which is considerably higher than CAD 29.2 million in the previous corresponding period. Continuation of the above trend might dampen the company’s overall performance. 

Financial Overview of Q1 2022 (In 000’s of CAD)

Source: Company Filing 

• In Q1 2022, the company posted higher revenue at CAD 232.1 million, which increased by 36.4% against CAD 170.1 million in the previous corresponding period. The growth in revenue was mainly driven by the added revenue contribution of LendCare coupled with the growth of the Company’s consumer loan portfolio.

• Total operating expenses stood higher at CAD 152.1 million, compared to CAD 106.2 million in pcp. This increment in expenses was mainly due to increase in salaries & benefits expenses, increase in bad debts coupled with a surge in advertising and promotion expense.

• Despite a rise in the operating expenses, the company reported its operating income of CAD 79.9 million, compared to CAD 63.9 million in Q1 2021.

• Net income stood at CAD 26.0 million in Q1 2022, significantly lower than CAD 111.9 million in pcp. The change was mainly due to fair value gains and losses taken on investments in the current and comparable periods.

Valuation Methodology (Illustrative): Price to Book Value-based

Analysis by Kalkine Group

Stock recommendation

The Company had stronger demand and an increase in loan originations across all products and channels during the quarter, resulting in a record level of first quarter loan growth and the second greatest quarter of organic growth in its history. Furthermore, the group saw an increase in loan originations, which resulted in CAD 124 million in organic growth in the loan portfolio, leading in a total gross consumer loan receivable portfolio of CAD 2.15 billion, up 69% from CAD 1.28 billion in pcp.

The company reported a constantly higher dividend distribution, backed by stable cash flow generation and at the last closing price of CAD 115.63, the stock is offering a dividend yield of 3.148%, which translates into an essential factor for regular income-seeking investors with a long-term horizon. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 115.63 on May 30, 2022. Furthermore, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 30, 2022). Source: REFINITIV, Analysis by Kalkine Group 

  Technical Analysis Summary

Home Capital Group Inc.

Home Capital Group Inc. (TSX: HCG) is a specialty finance company that offers residential and commercial mortgage lending, securitization of insured mortgage products, consumer lending, and credit card services. The company also offers deposits via brokers and financial planners, and through its direct-to-consumer deposit brand, Oaken Financial. 

Key Updates:

• Growth in Loan Under Administration: In Q1FY22, total Loans under administration stood at CAD 25.37 billion at the end of Q1FY22, up 11.4% from Q1FY21 and 5% over Q4FY21. The growth was supported by an increase in both the on-balance sheet and off-balance sheet portfolios. The group reported growth from the company’s Classic single-family residential mortgage portfolio, which reflects the company’s excellent origination and retention strategy.
• Reported higher total deposits: In Q1FY22, the company reported a stable deposit growth supported by new acquisition of Oaken in FY21. Notably, Oaken currently accounts for 31.5% of total deposits up 29.5% on a yearly basis. We expect the above momentum to continue due to company’s constant focus to enhance direct-to-consumer segment.

Source: Company Presentation

• High-Quality Loan book: The company reported strong operational efficiency and has consistently lowered its gross non-performing loans, which suggest highly-quality and well secured loan book. We expect the continuation of the above trend is likely to benefit the company’s operations in the coming years. A decline in non-performing loans despite sluggish economic scenario is encouraging.

Source: Company Presentation

• Positive cash flows: Despite the ongoing macro volatility, the company reported cash flows from operating activities of CAD 83.1 million in Q1FY22, as compared to a cash used in operating activities of CAD 26.3 million in pcp. This is likely to boost the company’s overall liquidity position.

• Dividend Update: On May 04, 2022, the company announced a common share dividend of CAD 0.15 per share for the second quarter of FY22, with a payment date of June 15, 2022. The record date is on May 31, 2022.

Risks associated with the Investment:

The company’s performances might be hindered due to the extension of the ongoing pandemic, as it would impact the overall consumer credit and might lead to higher non-performing loans. Despite strong performance from Oaken Financial, Total deposits fell from y-o-y and q-o-q basis, and continuation of the above trend might dampen the company’s overall performance.

 Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• HCG declared Q1FY22 result, wherein the company posted total revenue of CAD 125.6 million, stood higher from CAD 139.5 million in pcp. The slide was primarily due to the  decline in total net interest income.
• The period was marked by higher salaries and benefit expenses, increase in premises expenses, partially offset by a slightly lower other operating expense. Net Income stood a CAD 44.7 million, as compared to CAD 64.5 million in pcp, partially supported by a lower income tax expense.
• Non-performing loans stood at 0.11% of gross loans in Q1FY22, improved from 0.13% from Q4FY21 and 0.38% in Q1FY21, respectively. Net interest margin stood at 2.18%, slide from 2.61% in pcp.
  

Valuation Methodology (Illustrative): Price to Book Value

Analysis By Kalkine Group 

Stock Recommendation:

The company’s reported a stable growth in the total deposits and was highest in the last five quarters, which is a key positive from the operational point. Also, despite several macro headwinds like poor consumer sentiment, increase in non-performing assets, the company ended Q1FY22 on a positive note. This suggested disciplined cost structure along with secured loan book.

We have valued the stock using the price to book value-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Equitable Group Inc, AGF Management Ltd and Provident Financial Services Inc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of HCG at the last closing price of CAD 30.38 on May 30, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 30, 2022). Analysis by Kalkine Group

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

  Technical Analysis Summary

Doman Building Materials Group Ltd

Doman Building Materials Group Ltd. (TSX: DBM) is a wholesale distributor of building materials and home renovation products. The company services the new home construction, home renovation, and industrial markets by supplying the retail and wholesale lumber and building materials industry, hardware stores, industrial and furniture manufacturers, and similar concerns. 

Key Highlights:

• Increased revenue: During Q1FY22 the company witnessed an increase in the total revenue to CAD 851.30 million as compared to the total revenue of CAD 519.92 million in Q1FY21. The sales from the building and materials segment grew by CAD 332.9 million which was majorly from the acquisitions. The revenue for the Q1FY22 comprised 81% from construction materials, whereas the residual was a mix of 16% of specialty and allied products and 3% from others.

• Favorable macros: The improving macros especially the USA housing start, which as per the seasonally adjusted annualized rate overall, came out at an average of 1,753,000 units in Q1FY22 as compared to 1,605,000 units in Q1FY21, represents the rising demand for the houses which will be a key beneficial for the company.

• Rising prices of the construction material: The rising prices of the various commodities which are essential in the construction of houses are helping the company to fetch a higher average realized sales prices, thereby impacting the margins positively.

Source: Company filing

• Improved profitability margins in Sequential quarter: In Q1FY22, the company witnessed an increase in the revenues which were slightly offset by the increase in expenses, still the group managed to improve its profitability ratios on a sequential basis, which is represented below.

Source: Refinitiv, Analysis by Kalkine Group

• Improved liquidity profile: The company's quick ratio at the end of Q1FY22 was reported at an elevated level of 1.43x, as compared to the previous quarter (Q4FY21) of 1.06x. Further, the company’s current ratio at the end of Q1FY22 stood at 3.20x against the 2.92x at the end of Q4FY21. The higher quick ratio and current ratio state the company’s ability to meet its short-term obligations falling within one year time, without any hindrance, ensuring the smooth running of the business operations.

Source: Refinitiv, Analysis by Kalkine Group

Risks associated with investment

The company is exposed to a variety of risks including volatility in the lumber prices, any economic slowdown, rising interest rates, and COVID-19 restrictions, all of these can bring a slowdown in the construction activities, which will impact the revenues severely.  

Financial overview of Q1FY22 (Expressed in thousands of CAD)

Source: Company Filing 

• For Q1FY22, the company reported an increase in the total revenue to CAD 851.30 million against CAD 519.92 million during Q1FY21. The surge in the sales was from the product segments (building materials) on account of the positive impact of the acquisitions.

• The gross margins from operations increased to CAD 132.60 million in Q1FY22 against CAD 90.39 million in Q1FY21, this increase was mainly due to higher revenue numbers.

• The group reported the net income of CAD 42.02 million during Q1FY22 as compared to CAD 34.15 million in Q1FY21.
  

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The adjusted EBITDA of the company rose to CAD 78.1 million during Q1FY22 against CAD 60.0 million in Q1FY21, and the revenue also increased significantly to CAD 851.30 million in the Q1FY22 against the total revenue of CAD 519.92 million in Q1FY21. In this current scenario, the stock of the company is offering a dividend yield close to 7.7% which is of utmost importance for the regular income-seeking investors. On the valuation front, the stock is measured on the EV/ Sales based multiple and it is currently trading at a multiple of 0.5x which is lower than the industry (consumer cyclicals) median of 0.9x, indicating the stock is still undervalued and has much of the headroom to catch with its peers. We have considered Wajax Corp., DXP Enterprises Inc., etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock of DBM at the last closing price of CAD 7.28 on May 30, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as of May 30, 2022). Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITV

Technical Analysis Summary

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.