Metro Inc

Metro Inc (TSX: MRU) is one of the largest grocery retailers in Canada, following its 2018 acquisition of the Jean Coutu Group, the group also boasts a meaningful drugstore footprint. Noteworthy grocery banners include Metro, Metro Plus, Super C, and Food Basics, while its pharmacies primarily operate under the Jean Coutu and Brunet trademarks.

Investment Rationale 

• Strong Store Network: The company has built a network of ~950 food stores under several banners including Metro, Metro Plus, Super C and Food Basics, while in the pharmacy segment, the group has ~650 drugstores primarily under the Jean Coutu, Brunet, Metro Pharmacy and Food Basics Pharmacy banners.

• Synergies started paying off: Synergies related to the Jean Coutu acquisition generated for the third quarter and the first 40 weeks of fiscal 2020 amounted to CAD 23 million and CAD 53 million compared to CAD 16 million and CAD 40 million for the corresponding periods of fiscal 2019. The company had generated annualized synergies of CAD 70 million to date.

• Robust Same store sales: Food segment’s same-store sales were up 15.6% in 3QFY20 (3.1% in 2019). The group’s food basket inflation was approximately 3.0% (2.5% in 2019). Online food sales almost quadrupled in the quarter from a small base last year. Pharmacy same-store sales were up 1.0% (3.4% in 2019), with a 2.7% increase in prescription drugs and a 2.5% decrease in front-store sales.

2020 Third Quarter Highlights 

Source: Company

• The company delivered solid results in the third quarter, driven by strong sales growth. Sales in the third quarter of fiscal 2020 reached CAD 5,835.2 million, up 11.6% compared to CAD 5,229.3 million in the third quarter of fiscal 2019.  
• Operating income before depreciation and amortization and associate's earnings for the third quarter of fiscal 2020 totalled CAD 542.9 million, or 9.3% of sales, versus CAD 423.1 million, or 8.1% of sales for the corresponding quarter of fiscal 2019.
• Net earnings for the third quarter of fiscal 2020 were CAD 263.5 million compared with CAD 222.4 million for the corresponding quarter of fiscal 2019.
• The company declared a quarterly dividend of $0.225 per share on August 11, 2020, an increase of 12.5% over the dividend declared for the same quarter last year.

Share price Information

Source: Refinitiv (Thomson Reuters), Chart represents daily closing price.

Risk Associated to Investment

The Company's near-term outlook is clouded by the COVID-19 pandemic. While the company foresees revenue to remain above average through the duration of this pandemic based on its role as an essential service offering, but 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 the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation

Q3FY20 was a healthy quarter for the company as it came out with the decent performance, increase in same-store sales, healthy dividend payout ratio, improved net income and positive cash generated in this quarter. All these factors give a glimpse of strong foundations led by the company.

In the first four weeks of our fourth quarter, food same store sales increased about 10% versus last year. On the pharmacy side, in the first four weeks of our fourth quarter, front-end same store sales increased over 6%. We expect that in the short-term food revenues will continue to grow at higher-than-normal rates versus last year as a portion of restaurant and foodservice sales continue to transfer to the grocery channel.

Therefore, based on the above rationale and valuation done, we have given a “Hold” rating at the closing price of CAD 63.79 on October 15, 2020. We have considered Empire Company Ltd, Alimentation Couche-Tard Inc and Dollarama Inc as a peer group for the comparison purpose.

Clearwater Seafoods Inc

Clearwater Seafoods Inc (TSX: CLR) is a distributor of shellfish and seafood with operations in Asia, North America, and Europe. The company has approximately ten factory vessels located within Canada and Argentina. Majority of the company’s revenues are generated by their European branch.

Investment rationale

• Seasonality: The company’s business experiences a predictable seasonal pattern. Sales, margins and adjusted EBITDA are lower in the first half of the year and higher in the second half. As the group has entered the second half of financial reporting, we believe the company will post improved cash flows, lower debt balances and lower leverage.

• Higher margins by improving price realization and cost management – The company has made timely and prudent adjustments to their business to respond to changes in demand, including changes in harvest plans, product types and production schedules. This step would help in generating healthy margins from a revitalized fleet, resulting in lower costs and higher value for certain harvested species.

• Targeting profitable & growing markets, channels & customers – In the first half of 2020, global demand for seafood, primarily in food service, experienced a decline in many of Clearwater’s major markets as a result of COVID-19. Clearwater has expanded distribution through retail channels, introduced new products, increased promotional activity and continues to focus on expanding distribution for clam, langoustine, crab and whelk.

• Liquidity and capital resources – During the latest quarter, the Company’s cash balance was CAD 20.7 million, with access to an additional CAD 111.5 million through an undrawn, committed revolving credit facility. The group also repaid CAD 1.4 million of long-term debt and CAD 17.3 million of the Company’s revolving credit facility.
•  

Financial Overview: 2QFY20

Source: Company

• Sales for 2QFY20 were ~CAD 106.0 million as compared to CDA 153.9 million in the same periods of 2019. Volumes decreased across the species and regions in the first half due to lower demand in food service.
• Gross margin for second quarter was CAD 18.3 million as compared to CAD 31.5 million in 2019.

Source: Company

• Scallops were the biggest revenue contributor, but the group witnessed that demand for several scallop species weakened early in the quarter, as social distancing protocols implemented in key markets reduced sales in the food service segment.

Source: Company 

Risk Associated to Investments

The performance of the company’s business is prone to several risks which affect income, liquidity, risks related to resource supply, food processing, suppliers, customers, competition, and foreign exchange exposure. 

Share Price Performance

Source: Refinitiv (Thomson Reuters), Chart represents daily closing price

Valuation Methodology (Illustrative): EV to Sales

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation

The company was directly impacted by COVID-19 in the first half of 2020 as their global customer base faced the implications of the growing pandemic through foodservice closures, social distancing and other measures targeted at reducing spread.

Traditional retail and on-line consumer demand are thriving, whereas foodservice customers and their supply chains are experiencing interruptions. The demand improved in the latter part of the second quarter and is expected to improve further as the governments relax measures and markets continue to reopen. These would boost the business of the group in the coming days.

Therefore, based on the above rationale and valuation done, we have given a “Hold” rating at the closing price of CAD 7.22 on 15 October 2020. We have considered High Liner Foods Inc, Premium Brands Holding Corp, New Look Vision Group Inc, Park Lawn Corp etc. as the peer group for the comparison.

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.