Loblaw Companies Ltd

Loblaw Companies Ltd (TSX: L), is one of Canada's largest grocery, pharmacy, and general merchandise retailers which operates through two segments: Retail and Financial Services. The firm's controlling shareholder is George Weston Limited, which owns 52% of the equity.

Key Highlights

• Capitalizing in early investments in digital retail:The Company continues to capitalize on its early investments and market leadership in digital retail; its e-commerce sales grew by 178% and delivered CAD2.8 billion of sales, including CAD 2.0 billion in grocery in 2020. Furthermore, the group is focused on driving improvements in digital profitability over time through operational efficiencies and technology, sales and margin.

• Repaid long term debts:On the back of healthy operations, the company repaid CAD 177 million of long-term debt in the reported quarter, compared to a net repayment of long-term debt of CAD 12 million in the previous corresponding period.

• Increase in free cash flows: On the back of robust operations coupled with a decrease in credit card receivables because of higher payment rates compared to the prior year and higher cash earnings, the company posted healthy free cash flow in Q4 2020, which stood at CAD 606 million compared to CAD 272 million in Q4 2019.

Source: Company

Ample liquidity: The Company ended FY2020 with consolidated cash and short-term investments balance of CAD 1.93 billion Vs CAD 1.19 billion in FY 2019. Moreover, the group hold CAD 1.0 billion of committed credit facility, with a maturity date of October 7, 2023. This ample liquidity enables the company to comfortably finance its capital investment program and fund its ongoing business requirements. 

Financial overview of Q4 2020

Source: Company

• In Q4 2020, the company posted revenue of CAD 13.28 billion, increased by 14.6% as compared to CAD 11.59 billion in the previous corresponding period. The increase in revenue was mainly due to positive momentum from same-store sales growth and a net increase in retail square footage.
• Adjusted EBITDA stood at CAD 1.33 billion in Q4 2020, increased by 10.5% as compared to CAD 1.20 billion in Q4 2019. On the other side, the adjusted EBITDA margin fell to 10%, as compared to 10.4%. The fall in margin was due to an increase in COGS and higher SG&A expenses.
• The company’s reported net earnings attributable to shareholders in Q4 2020 increased by 35.4% to CAD 348 million, as compared to CAD 257 million in the previous corresponding period.

Risks associated with investment

Lower consumer spending, coupled with a decline in the traffic, might act as a drag for the company, which could dampen the overall performance.

Valuation

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

Stock recommendation

The Company caters to the retail consumers, and the demand is likely to remain strong due to the demand dynamics within the retail segment.  The company witnessed same-store sales growth and a net increase in retail square footage in Q4 2020; this would further support the future income. The group is also reaping the benefits of early investments in digital retail. Its e-commerce sales grew by 178% and delivered CAD2.8 billion in sales, including CAD2.0 billion in grocery in 2020. Furthermore, the Company clocked a free cash flow of CAD 606 million in the reported quarter and repaid its long-term debts. Therefore, based on the above rationales and valuation, we recommend a “Buy” rating at the closing price of CAD 61.74. We have considered Metro Inc, Alimentation Couche-Tard Inc, Empire Company Ltd, etc. as the peer group for the comparison. 

Source: Refinitiv (Thomson Reuters)

Maple Leaf Foods Inc.

Maple Leaf Foods Inc (TSX: MFI) is a consumer-packaged meats company, originally from Canada. The company produces prepared meats and meals, fresh pork, and poultry and turkey products. The firm also has agribusiness operations. These operations supply livestock to the meat products business operations. The group's primary markets are Canada, the United States, Mexico, and Japan. 

Key Highlights:

• New Product Launch: Recently, the company launched a new plant-based hot dog category with the launch of Field Roast Signature Stadium Dog. The product is a plant-based hot dog extracted from pea protein and would be sold alongside traditional beef dogs and is expected to be available in retail stores in the coming days. The above innovative product is targeted for food enthusiasts, while it contains the same amount of protein per serving like traditional hot dogs.
• Stock Hovering above the short-term support levels: The stock of MFI closed above the short-term support levels of 10-days, 15-days and 20-days simple moving average (SMA), indicating a bullish pattern. Moreover, in the recent past, the stock appreciated ~16% in the last one year. 

(Source: Refinitiv, Thomson Reuters) 

• Impressive Guidance: For FY21, the company expects strong sales growth within the Meat Protein Group, driven by growing demand from the plant protein segment. Moreover, the group expects its EBITDA margin to improve from 14% to 16% in FY22, in line with the company’s long-term target. 

Q4FY20 Financial Highlights:

• MFI impresses with its quarterly results, wherein the company posted sales of CAD 1,129.2 million, reflecting a growth of 11.1% on a y-o-y basis. The increase was driven by strong growth in both the Meat and Plant Protein Groups supported by favorable product mix.
• Gross profit stood at CAD 180.3 million, as compared to CAD 160.8 million in the previous corresponding period (pcp). The increase was driven by favorable product and channel mix along with growth in sustainable meats and strong operational performance, partially offset by incremental costs due to COVID-19.
• The group reported total SG&A at CAD 126.8 million, slightly lower than CAD 129.3 million in Q4FY19. The company reported an adjusted EBITDA of CAD 109.1 million, significantly higher than CAD 75.3 million in the previous corresponding period. Adjusted EBITDA Margin was reported at 9.7%, improved significantly than 7.4% in Q4FY19.
• The company posted net earnings of CAD 25.4 million, as compared to CAD 17.5 million in Q4FY19.
• Cash and cash equivalents stood CAD 100.828 million, while total assets were recorded at CAD 3,860.205 million.

Q4FY20 Financial Highlights (Source: Company Reports)

Risks: The demand for the products depends upon the consumer taste and preferences, while a change in the consumer demand would weigh high on the sales volume.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock Recommendation:

The company is an established brand within the Meat Protein and is looking for capacity expansion within the dry cured meats & protein kits and would focus on building leadership in sustainable meats segments. Within the plant protein segment, the company would enhance its brand awareness through strategic investment and would accelerate its innovation pipeline, which is a key positive. We have valued the stock using the P/E based relative valuation approach and arrived at a target price, which suggests a double-digit upside side potential (in % terms). For the said purpose, we have considered peers like Dollarama Inc, Dollarama Inc etc. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 26.13 on March 1, 2021.

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

Disclaimer

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