Metro Inc.

Metro Inc. (TSX: MRU) is a Canada-based company engaged in the food and pharmaceutical industry. The Company portraits a retailer, franchisor or distributor's role under various grocery banners in the conventional supermarket and discount segments.

Key highlights

• Growing Same-store Sales: In Q1 2021, the Company registered growth in all the segments through same-store sales. Food same-store sales were up 10.0% as against 1.4% in Q1 2020. Online food sales are up 170% versus last year. Group’s food basket inflation was flat at 2.5%, against 2% compared to the previous year. Pharmacy same-store sales were up 1.3%, with a 4% increase in prescription drugs. 

• Better than industry margin profile:The Company outperformed the industry margin profile, which is a key positive. In Q1 2021, the group reported EBITDA margin, operating margin, and a net margin of 10.0%, 6.8% and 4.5%, respectively, which was higher than the industry median of 4.9%, 3.2% and 1.9%. 

• Improvement in cash from operating activities: In the first quarter of 2021, operating activities generated cash inflows of CAD 233.4 million compared with CAD 79.5 million in the previous corresponding period. This difference resulted primarily from the increase in earnings and the change in non-cash working capital items.

• Increase in Dividend distribution: On January 25, 2021, the Company declared a quarterly dividend of CAD0.25 per share, an increase of 11.1% versus the same quarter last year.

• NCIB programs: Under the current normal course issuer bid program, the Company may repurchase up to 7 million of its Common Shares between November 25, 2020, and November 24, 2021. Furthermore, between November 25, 2020, and January 15, 2021, THE GROUP repurchased 1.75 million Common Shares at an average price of CAD 58.39, for a total consideration of CAD 102 .2 million.

• Event update:  The company will be releasing its second quarter fiscal 2021 results on April 21, 2021. 

Financial overview of Q1 2021 (In Millions of CAD)

Source: Company 

• In Q1 2021, the company posted sales of CAD 4,278.2 million, which increased by 6.2% compared to CAD 4,029.8 million in the previous corresponding period. The increase was primarily due to growth in same-store sales in all the segments.

• Operating income before depreciation and amortization in Q1 2021 stood at CAD 399.2 million, or 9.3% of sales, as against CAD 363.1 million, or 9% of sales for the corresponding quarter of fiscal 2020.

• In Q1 2021, the company reported Net earnings of CAD 191.2 million against CAD 170.2 million in the previous corresponding period. The increase was primarily due to high revenue, partially offset by growth in depreciation cost. 

Risks associated with investment

The COVID-19 pandemic still clouds the Company's near-term outlook. While the Company foresees revenue to remain above average through this pandemic's duration based on its role as an essential service offering, there is downside risk to this outlook related to increased outbreaks of COVID-19 and potentially severe economic challenges.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

Government measures to curb the ongoing pandemic impact have been increased in recent weeks and continue to evolve, and simultaneously the Company foresees its food revenues to continuously grow at higher-than-normal rates against last year, as a portion of the restaurant, foodservice sales continue to transfer to the grocery channel, as in the first four weeks of the second quarter of 2021, food same-store sales were up 12.0% versus the same period last year. Therefore, based on the above rationale and valuation, we have given a "Buy" rating at the closing price of CAD 57.33 on March 31, 2021. We have considered Dollarama Inc, Alimentation Couche-Tard Inc, Saputo Inc, etc. as the peer group for the comparison.

1-Year Price Chart (as on March 31, 2021). Source: Refinitiv (Thomson Reuters)

Lassonde Industries Inc

Lassonde Industries Inc (TSX: LAS.A), is a Canada-based company, which develops, manufactures and markets a range of ready-to-drink fruit and vegetable juices and drinks. The Company is a producer of store brand shelf-stable fruit juices and beverages in the United States, and it is also a producer of cranberry sauces.

Key highlights

• Consistent dividend payment: Despite a challenging operating environment, the group continue to distribute a dividend, which shows the financial flexibility of the group. Recently, the group paid a quarterly dividend of CAD 0.65 per share.

Source: Refinitiv (Thomson Reuters)

• Capacity Addition: With a total investment of over CAD 30.0 million, the company is trying to increase the production capacity of low-acidity products. Furthermore, the management expects that an additional capacity would increase the sales by 25% to 30% upon completing the project.

• Decline in Debt: The Company managed to bring down its total debt obligations to CAD 215.5 million in FY2020, against CAD 265.1 million in the previous corresponding period. The lower debt levels resulted from a significant cash flow generation in 2020. The Company's operating activities generated CAD 231.2 million in cash, while they had generated CAD 140.7 million in cash during 2019.

Source: Company

• Positive Demand Outlook: Despite a slide in the overall consumption pattern, the U.S. and Canadian fruit juice and drinks market stood resilient in the recent past, and the company registered a growth of 6.8% in 2020 compared to 2019, primarily attributable to the change in the consumption pattern. We expect the above trend to continue in the upcoming days. The corporation is likely to deliver an improved top-line for FY21, which is a key positive and is expected to support profitability and cash flows.

Financial overview of FY2020 (in thousands of CAD)

Source: company

• The Company posted sales of CAD 1,981 million in FY2020, higher than CAD 1,678.3 million in the previous corresponding period. The increase was driven by changes in food habits related to the impacts of COVID–19, as industry sales volumes have also benefited from a notable increase.

• Operating profit stood at CAD 152 million, increased by CAD 51.1 million, compared to CAD 100.8 million in FY2019. This increase was explained by higher gross margins from the Company's U.S. and Canadian operations, mainly due to increased sales volume and a decrease in the cost of certain raw materials.

• The Company posted a net profit of CAD 101.8 million, higher than CAD 75 million a year ago. 

Risks associated with investment

The company is exposed to a variety of risks, including the economic, industrial, competitive and regulatory environment, its ability to attract and retain customers, changing consumer preferences, the availability and cost of raw materials and transportation, etc. 

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

In 2020, the Company noted a marked increase in industry sales volumes in the U.S. and Canadian fruit juice and drinks markets. Excluding Sun-Rype's sales and foreign exchange impacts, its sales were up 6.8% in 2020 compared to 2019. It also observed improved profitability in the U.S. operations due to the strong demand for its products. However, the competitive environment continues to be challenging at the private label level in the United States. Furthermore, the Company would be increasing its storage capacity at one of its Canadian plants and the production capacity for single-serve fruit juices and drinks in the United States, and the management expects that the additional capacity would increase the sales by 25% to 30% upon completing the project. Therefore, based on the above rationale and valuation, we suggest a "Buy" rating at the closing price of CAD 172 on March 31, 2021. We have considered Rogers Sugar Inc, Simply Good Foods Co, B&G Foods Inc., etc as the peer group for the comparison.

1-Year Price Chart (as on March 31, 2021). 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.