North West Company Inc.

Decent Increase in Sales and EBITDA: North West Company Inc. (TSX: NWC) is a Canada-based company that is principally engaged in retail business in underserved rural communities and urban neighborhoods. As on 15 July 2020, the market capitalization of the company stood at ~CAD 1.51 billion.

Quarterly Performance (For the Period Ended 30 April 2020): During the first quarter ended 30 April 2020, the company witnessed strong business volumes despite the COVID-19 crisis. During the quarter, consolidated sales increased by 19.8% to CAD 592.6 million. This was mainly due to the same store sales gains across all regions, the impact of new store sales and the positive impact of foreign exchange on the translation of International Operations sales. This resulted in an increase in gross profit by 17.9%. In the same time span, earnings from operations decreased by 47.4% to CAD 19.5 million as compared to CAD 37 million last year and EBITDA went down by 25.5% to CAD 43.4 million due to the non-comparable expense factors.

Key Risks: The company is exposed to various risks including unusual changes in business performance, fluctuations in interest rates and currency values, legislative and regulatory developments, legal developments, the occurrence of weather-related and other natural catastrophes, and the changes in tax laws.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings 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 Board has declared a dividend of CAD 0.33 per share to shareholders which was paid on 15 July 2020. As per TSX, the stock of NWC is trading close to its 52-week high of CAD 32.01. The stock of NWC gave a return of 29.5% in the past three months and a return of 8.53% in the last one month. We have valued the stock using the price to earnings multiple based illustrative relative valuation and have arrived at a target price of higher single-digit (in percentage terms). Considering the current trading levels, decent returns in the past three months, and improvement in financial performance despite the global pandemic, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 30.89, up by 1.9809% on 15 July 2020.

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

Alimentation Couche-Tard Inc

Healthy Cash Position and Improving ROC: Alimentation Couche-Tard Inc. (TSX: ATD.B) operates a network of convenience stores across various countries. The company primarily generates income through the sale of tobacco products, groceries, beverages, fresh food, quick service restaurants, car wash services, other retail products. As on 15 July 2020, the market capitalization of the company stood at ~CAD 38.97 billion.

Quarterly Results (For the Period Ended 26 April 2020): During the quarter, the company witnessed meaningful impact on its financial results mostly driven by declining traffic across the network. However, fuel margins benefited from the rapid and steep decline in crude prices and by changes in the competitive landscape. During the quarter, total merchandise, and service revenues of went down by 2.6% to USD 3.2 billion and merchandise and service gross margin decreased by 0.9% in the U.S., 1.2% in Europe, and 1.2% in Canada, all impacted by product mix. The company retains a healthy cash position, with access to ~USD 4.7 billion through available cash and its revolving unsecured operating credit facility. The company has increased its annual dividend of 17.8%, from CAD 22.5 cents to CAD 26.5 cents and return on capital employed improved from 12.6% to 15.0% on a pro forma basis.

Quarterly Financial Highlights (Source: Company Reports)

Key Risks: The declining traffic due to the restrictive social measures in the various geographies due to the global pandemic led to fewer visits in stores in Europe and North America. The company is exposed to risks including fluctuations in margins on motor fuel sales, competition in the convenience store and retail motor fuel industries, and exchange rate variations.

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

EV/Sales Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The company faced the crisis in a strong position from a financial standpoint, with a solid balance sheet and well spread debt maturities. The stock of ATD.B gave a return of 26.49% in the past three months and a return of 9.41% in the last one month. As per TSX, the stock of ATD.B is trading close to its 52-weeks’ high level of CAD 46.39 but holds the potential for further growth. We have valued the stock using the EV/Sales multiple based illustrative relative valuation and arrived at a target price of middle single-digit (in percentage terms). Considering the current trading levels, decent returns in the past one month, improving financial performance and positive impact of COVID-19 on fuel margins, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 45.37, down by 0.7221% on 15 July 2020.

ATD.B 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.