Dollarama Inc.

Volatile Returns and Limited Potential: Dollarama Inc. (TSX: DOL) is a Canada-based company, which is principally engaged in operating discount retail stores. The company provides a broad range of everyday consumer products, general merchandise, and seasonal items, with merchandise at low fixed price points. As on 27 July 2020, the market capitalization of the company stood at ~CAD 14.89 billion.

Quarterly Performance (For the Period Ended 3 May 2020): During the first quarter, the company reported sales growth of 2% to CAD 844.8 million and gross margin of 41.3% of sales as compared to 42.1% of sales in the pcp. This was mainly due to negative scaling on lower sales per store, higher sales of lower margin consumable products and incremental direct costs related to COVID-19 measures implemented in the second half of the quarter. In the same time span, EBITDA decreased by 5.8% to CAD 213.7 million and operating income went down by 11.2% to CAD 149.7 million.

Quarterly Financial Highlights (Source: Company Reports)

Key Risks: The company has faced a direct and indirect impact of COVID-19. The company estimates direct costs of approximately CAD 15 million to combat the impacts of the global pandemic. Nationwide lockdown and the imposed restrictions to curb the spread of COVID-19 resulted in temporary store closures, which is further likely to impact the results of the coming quarters.

Stock Recommendation: The company has reported higher capital expenditure reflecting additional store-related transformational capital expenditures. As per TSX, the stock of DOL is trading slightly above the average 52-weeks’ trading level and holds a limited potential for growth. The stock of DOL gave a return of 9.61% in the past three months and a return of 7.45% in the past one month. On Trailing Twelve Months basis (TTM), the stock is trading at an EV/Sales multiple of 4.5x, higher than the industry median (consumer cyclicals) of 1.1x, and thus seems overvalued. Considering the current trading levels, softer market conditions and decline in quarterly performance, we recommend investors to keep an eye on the business activities and suggest a watch stance on the stock at the closing market price of CAD 47.9, up by 1.2899% on 27 July 2020.

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

Premium Brands Holdings Corporation

Completion of Public Offering: Premium Brands Holdings Corporation (TSX: PBH) is engaged in specialty food manufacturing, premium food distribution and wholesale businesses with operations in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nevada, and Washington State. As on 27 July 2020, the market capitalization of the company stood at ~CAD 3.66 billion. The company has recently announced the successful closing of the issue and sale of 1,599,650 common shares at a price of CAD 86.30 and unsecured subordinated debentures of CAD 150,000,000.

Quarterly Performance (For the Period Ended 28 March 2020): During the first quarter ended 28 March 2020, the company reported record quarter revenue of CAD 935.0 million, representing an increase of 20.4% as compared to the first quarter of 2019. In the same time span, the company also reported record first quarter EBITDA of CAD 64.3 million and adjusted EPS of CAD 0.53 per share as compared to CAD 0.52 per share in the first quarter of 2019. The company also reported a healthy balance sheet with CAD 214.2 million of available credit capacity. Subsequent to the quarter, the company declared a quarterly dividend of CAD 0.5775 per share.

Quarterly Performance (Source: Company Reports)

Key Risks: The company expects the situation to get more challenging as many of its plants begin to ramp up to meet growing summer demand. Balancing improved processes around physical distancing with rising production demands while facing increasing disruptions in supply chains is going to be very difficult for the company.

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 company is aiming to reach CAD 6 billion in sales and CAD 600 million in EBITDA by 2023. However, the company is expecting a significantly negative impact on its results for the second quarter. The company has scheduled its release for the second quarter on 6 August 2020. As per TSX, the stock of PBH is inclined towards its 52-weeks’ high level of CAD 102.68 and retains the limited potential for growth. The stock of PBH gave a return of 8.81% in the past three months and a return of 6.52% in the last one month. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation and have arrived at a downside of lower single digit (in percentage terms). For the said purposes, we have considered North West Company Inc, High Liner Foods Inc, Recipe Unlimited Corp, etc. as peers. Considering the current trading levels, decent returns, uncertain short-term outlook and softer market conditions from the outbreak of the COVID-19 crisis, we suggest investors to keep an eye on the business activities and recommend a watch stance on the stock at the closing market price of CAD 92.48, up by 0.5983% on 27 July 2020.

PBH 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.