Clearwater Seafoods Incorporated (TSX: CLR) is one of the leading vertically integrated harvester, processor and distributor of premium seafood. The Group operates in wild-caught shellfish with harvesting operations in Canada, Argentina and the UK.

Q1FY20 Financial Highlights: For the period ended April 4, 2020, CLR reported a lower revenue of CAD 100.34 million, as compared to CAD 120.08 million in pcp. The decline was primarily attributable to the soft consumer sentiment on account of COVID 19 and a drastically lower income from the Asia segment, partially offset by a net positive impact from average foreign exchange rates. Gross margin slide to CAD 16.14 million from CAD 21.55 million in pcp, due to a lower income scenario. The quarter witnessed an inclusion of restructuring costs and a higher research and development expense. Further, a significantly higher foreign exchange losses coupled with losses on derivative financial instruments have taken a toll on the profitability. Net loss during the period stood at CAD 31.53 million, as compared to a profit of CAD 10.78 million in pcp. To cater to the current downturn, the Group has cancelled the dividend payment program, which is likely to retain the liquidity level of the Business.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: The Company might face challenges within the traditional retail segment if the COVID-19 restrictions extended or reintroduced. Further, a second wave of the novel virus might interrupt the supply chain. 

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

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

Stock Recommendation: The stock corrected ~13.5% so far this year amid a challenging environment. The Company witnessed challenges in a few segments due to the ongoing restrictions on account of COVID 19 pandemic. However, certain segment like FAS shrimp and whelk remain strong during the first quarter and is expected to retain the momentum in the coming months. The group has taken prompt measure to lower its input costs which is likely to increase the operating efficiency levels and margins. CLR also expects to be benefitted from strong catch rates and lower fuel costs for the rest of FY20. The Company also prioritize on improving its packaging format and enhancing its global footprints through e-commerce segments. To mitigate the current challenging environment, the group ensured optimum liquidity levels and added CAD 91.3 million through a committed revolving credit facility, which is likely to support the near-term requirements. We have valued the stock using EV to Sales based relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered peers like High Liner Foods Inc, Park Lawn Corp, Premium Brands Holdings Corp etc. Hence, considering the above factors, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 4.96 on June 15, 2020.

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

High Liner Foods Incorporated

High Liner Foods Incorporated (TSE: HLF) is engaged in processing and marketing of a wide range of frozen seafood, from breaded and battered items to seafood entrées. The Company distributes to institutions, health care facilities, and quick-service family and casual dining organizations across North American. The Group operates through brands like High Liner Culinary, Mirabel, FPI, Viking, American Pride, High Liner, Fisher Boy, Sea Cuisine and others.

Q1FY20 Financial Highlights: HLF declared a stable set of quarterly numbers and reported sales of USD 268.58 million, as compared to USD 277.42 million in pcp. The decline was majorly attributable to a marginally lower sales volume as compared to the previous corresponding quarter. Gross profit stood higher at USD 58.77 million from USD 56.07 million, despite a lower income, supported by a significantly lower cost of sales. Results from operating activities stood lower at USD 24.88 million, as compared to USD 26.48 million in pcp. The Company reported lower distribution expenses and selling, general & administrative expenses. Net income, during the period, stood at USD 14.27 million, as compared to USD 14.6 million in the previous corresponding period.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Key Risks: The foodservice segment (representing ~65% of the income) witnessed a lower consumer demand due to existing lockdown and social distancing scenario prevailing across the North American markets. If the government decided to extend the restriction measures or a second wave of the virus arises, the company’s performance is expected to affect adversely in such cases.

Stock Recommendation: The stock of HLF corrected ~20% so far this year on account of stiff correction in the market due to COVID 19 pandemic. In the recent past, the company witnessed a solid demand from retail customers, and the company has successfully catered to the growing demands through redirecting resources, inventory and production capacity across its integrated North American operations. However, the demand from foodservice segment decline due to temporary closure of businesses such as restaurants. We believe the demand from foodservice segment to recover gradually as the governments across the states are easing the restrictions and allowing businesses to resume operations. Further, the company mentioned that it did not face any supply chain disruption owing to COVID-19. The company is strengthening its retail capacity along with managing cost in order to support the working capital and near-term liquidity. Talking about, liquidity, the company does not have any impending debt maturities in the near term and has the option to utilize USD 150.0 million working capital credit facility, if required. The stock is available at an extremely attractive valuation as compared to the industry, due to the recent fall in the stock price. The stock is trading at an EV/Sales of 0.6x on NTM basis, as compared 1.6x of the industry (Consumer Non-Cyclicals) median. Hence, we recommend a ‘Speculative Buy’ on the stock at the current closing price of CAD 6.59 as on June 15, 2020.

HLF 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.