Canadian Pacific Railway Limited

Canadian Pacific Railway Limited (TSX: CP) is a transcontinental railway in Canada and the United States with direct links to major ports on the west and east coasts.

Key Updates:

• Robust Margins: The group reported solid margin, despite the current economic slowdown, which suggests an operational resiliency. Gross margin, EBITDA margin and operating margin stood at 88.9%, 55.9% and 46.1%, respectively, in Q4FY20, significantly higher than the industry median of 51.9%, 21.4% and 10.5%, respectively. The group reported its net margin at 39.9%, significantly higher than 8.6% of the industry median.

• Bullish Technical Indicators: The stock of CP 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 soared ~41% and ~25%, respectively in the last nine month and one year, respectively driven resilient business model.

Source: Refinitiv (Thomson Reuters)

• Agreement with TCRC-RCTC: Recently, the group reported its agreement with the Teamsters Canada Rail Conference Rail Canada Traffic Controllers (TCRC-RCTC) for a tentative period of three-years. TCRC-RCTC has operations across more than 300 rail traffic controllers in Canada.

• Impressive Guidance: For FY21, the group expects its adjusted diluted EPS to grow in double-digit from FY20. Moreover, CP expects volume growth of higher single digit in FY21 from FY20, while capital expenditure is expected at CAD 1.55 billion.

Q4FY20 Financial Highlights:

• CP announced its quarterly result, wherein the company posted revenue of CAD 2,012 million, slightly lower from CAD 2,069 million in the previous corresponding period (pcp).
• Total operating expense stood lower at CAD 1,084 million, from CAD 1,179 million in pcp, supported by lower fuel costs, lower purchase services and other costs, partially offset by higher compensation and benefits.
• The company posted higher operating income of CAD 928 million, compared to CAD 890 million, supported by lower operating expenses.
• Net income soared to CAD 802 million during the quarter, from CAD 664 million in Q4FY19.
• The group posted cash and cash equivalent of CAD 147 million, while total assets were recorded at CAD 23,640 million.

Q4FY20 Income Statement Highlights (Source: Company Reports)

Risks: Volatility in the commodity prices, higher fuel costs may take a toll on the company’s profitability and margins.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

The group has delivered consistently improved performance over the years irrespective of economic cycles, backed by a resilient business model. The group reported higher revenue, gross profit and operating income of CAD 2,012 million, CAD 1,789 million and CAD 928 million in Q4FY20, as compared to CAD 1,863 million, CAD 1,670 million and CAD 779 million in Q3FY20, which is worth mentioning. The company continues to be the industry leader as it is leveraging its unique growth opportunities and applying the precision scheduled railroading operating model. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit downside (in percentage terms). For the said purposes, we have considered peers Canadian National Railway Co, Union Pacific Corp etc. Considering the aforesaid facts, we recommend a ‘Watch’ rating on the stock at the closing market price of CAD 451.23 on February 9, 2021 and would advise investors to wait for a better entry point.

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

Information Services Corp

Information Services Corp (TSX: ISV) is a Canada-based company, which provides registry and information management services for public data and records. The Company’s segments include Registry Operations, Services and Technology Solutions. 

Key Highlights 

• The bullish stance of the management: For FY2020, the management is expecting revenue to be above the consensus estimate of CAD 135.7 million, based on strength in the Saskatchewan real estate market in the third and fourth quarters, new customer acquisitions in the Services segment and the addition of new Recovery Solutions division through Paragon. The group would also be focusing on cost management, combined with COVID-19 related reductions, which is expected to assist in the strong fourth quarter and annual EBITDA performance, compared to consensus estimates of CAD 11.3M and CAD 41.2M, respectively. 

• Acquired Paragon Inc: During the quarter, the company acquired Paragon Inc (“Paragon”), whose primary focus is the facilitation and coordination of asset recovery on behalf of many of Canada’s major banks. The addition of Paragon’s assets is expected to strengthen the group’s current service offering, and also it will be offering its clients a complete solution in the credit life cycle. 

• Increase in free cash flow: The company reported a free cash flow of CAD 9.4 million in Q3 2020, increased by CAD 2.8 million, compared to CAD 6.5 million in the previous corresponding period. An increase in free cash flow was primarily due to the rise in working capital and higher results of operations.

Source: Company 

• Dividend Distribution: On January 15, 2021, the group paid a quarterly cash dividend of CAD 0.20 per Class A Limited Voting Share. Moreover, at the last closing price, the stock was offering a dividend yield of ~3.7%, which is decent amid low interest rate environment. 

Financial overview of Q3 2020

Source: Company 

• In the reported quarter, the company clocked an increase of CAD 4.9 million in revenue to CAD 37.1 million, against CAD 32.1 in the previous corresponding period. Higher revenue was driven by a combination of organic growth and the acquisition of Paragon.
• Total expenses stood at CAD 29.7 million, against CAD 26.8 million in Q3 2019. The group registered higher professional and consulting services in the quarter.
• On the back of higher revenue, cost management strategies with reductions in wages and salaries and occupancy costs in Q3 2020, the company registered a net income of CAD 5 million, against CAD 3.3 million in the previous corresponding period.

Risks associated with investment

The market condition in which the company operates is full of challenges and might impact the operational performance and reduce financial performance as well. Any change in regulations and government policies could affect the overall business of the company. 

Stock recommendation

In the Registry Operations and Services segments, the management expects volumes to be lower than normal in 2021, as the pace of recovery of the Canadian economy may be uneven and is dependent on how long the pandemic continues. Despite this, the group continues to invest in the technology supporting its Services segment and transition away from legacy platforms to optimize the customer experience through automation of the delivery of services and reduce the cost of delivery. The group expects revenue to be above the consensus estimate of CAD 135.7 million, based on the Saskatchewan real estate market's strength in the third and fourth quarters, new customer acquisitions in the Services segment. On the valuation front, the stock is trading at a forward Price to Cash Flow multiple of 9.9x, which is at par with the industry medina of 10x. 2021. Based on the above-stated reasons we recommend a "Watch" rating at the closing price of CAD 21.75 on February 9, 2021 and look for the better entry point.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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