Metro Inc.

Higher Sales and Gross Margin: Metro Inc. (TSX: MRU) is one of the largest grocery retailers in Canada. As on 22 July 2020, the market capitalization of the company stood at ~CAD 14.70 billion.

Quarterly Performance (For the Period Ended 14 March 2020): During the second quarter of FY20, the company reported a growth of 7.8% in sales to CAD 3,988.9 million as compared to CAD 3,701.6 million in the second quarter of fiscal 2019. In the same time span, gross margin on sales stood at 19.7% and operating income before depreciation and amortization and associate's earnings totalled to CAD 374.1 million. Higher sales and operating income resulted in an increase in net earnings to CAD 176.2 million, which further resulted in diluted net earnings per share of CAD 0.69.

Quarterly Financial Highlights (Source: Company Reports)

Key Risks: With the increased restrictions and the nationwide lockdown due to the outbreak of COVID-19 crisis, disposable income of the households took a hit. The lower income may further result in decreased sales of the company. However, the ease in restrictions may reduce the risk of uncertainty.

Outlook: The company is experiencing higher food revenues due to the COVID-19 pandemic but is also witnessing higher operating expenses. MRU also expects delays in some investment projects, including the new automated grocery distribution centers in Ontario.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The decent financial performance of the company enabled the Board to declare a quarterly dividend of CAD 0.225 per share, an increase of 12.5% over the dividend declared for the same quarter last year. As per TSX, the stock of MRU is trading slightly above the average of its 52-week trading levels and still holds the potential for growth. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target upside of higher single-digit (in percentage terms). Considering the current trading levels, decent returns on YTD basis, the positive impact of COVID-19 on sales of the company and positive long-term outlook, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 58.30, up by 0.189% on 22 July 2020.

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

Empire Company Limited

Growth in Market Share: Empire Company Limited (TSX: EMP.A) is in the business of food retailing, investments, and other operations. As on 22 July 2020, the market capitalization of the company stood at ~CAD 5.73 billion.

Full Year Performance Highlights (For the Year Ended 2 May 2020): During the year ended 2 May 2020, sales increased by 5.8%, driven by the impact of COVID-19, improved performance across the business, the consolidation of a full year of Farm Boy results, the expansion of FreshCo in Western Canada and inflation. In the same time span, gross profit increased by 9.0% and gross margin for the fiscal year increased to 24.9% from 24.2% last year. During the year, operating income witnessed an increase and stood at CAD 324.3 million. This was mainly due to improved earnings from the Food retailing segment as a result of higher sales and margins driven by the impact of COVID-19, category resets benefits and a gain on the surrender of a lease, partially offset by higher selling and administrative expenses.

Financial Highlights (Source: Company Reports)

Outlook: The company is targeting an incremental CAD 500 million in annualized EBITDA, driving an improvement in EBITDA margin of 100 basis points by FY23. EMP.A is expecting growth in market share and is further investing in the store network, improving store productivity, scaling up grocery e-commerce, growing the private label portfolio, continuing the Western discount business expansion, and increasing the Farm Boy footprint in Ontario.

Key Risks: Investment in EMP.A is subject to inherent risks, uncertainties, and other factors. The outbreak of COVID-19 has resulted in restrictions and shutdowns, leading to increased safety protocols in stores and distribution centres, shifts in consumer demand and consumption, and volatile financial markets.

Valuation Methodology: EV to Sales Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: As of May 2, 2020, Empire had CAD 1,008 million in cash, and access to ~CAD 761 million in unutilized, aggregate credit facilities that do not expire until FY23. As per TSX, the stock of EMP.A is moving towards its 52-weeks’ high level of CAD 37.44 but retains potential for further growth. The stock of EMP.A gave a return of 8.04% on the YTD basis and a return of 1.83% in the last three months. We have valued the stock using the EV to Sales multiple based illustrative relative valuation approach and have arrived at a target upside of lower double-digit (in percentage terms). Considering the current trading levels, decent returns in the past three months, ample liquidity and resilient financial performance amidst the outbreak of global pandemic, we recommend a ‘Hold’ rating on the stocks at the closing market price of CAD 33.53, up by 1.8839% on 22 July 2020.

EMP.A 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.