MTY Group Inc

MTY Group Inc (TSX: MTY) franchises and operates quick-service and casual dining restaurants under over eighty different banners across Canada, the United States and globally. 

Key Highlights:

• Management Update: Recently, the group reported the appointment of Mrs. Suzan Zalter to its board of directors.
• Reduction in Debt level: The group has successfully reduced its total debt, which is a key positive. As of February 28, 2021, the company reported total debt of CAD 993 million, reflecting a fall of ~17% from a year ago. A reduction in debt indicates higher financial flexibility and a lower finance cost.
• Better than Industry margins: The company reported a higher margin than its peers, which is worth mentioning. EBITDA margin and operating margin, at the end of Q1FY21, stood at 25.6% and 14.6%, respectively, compared to the industry median of 15.1% and 9.4%, respectively. Moreover, the company’s net margin stood higher at 11.3% in Q1FY21, as compared to 4.6% of the industry median.

Q1FY21 Financial Highlights:

• MTY announced its quarterly result, wherein the revenue stood at CAD 118.960 million, lower than CAD 150.780 million in the previous corresponding period (pcp). The decrease was primarily due to a sluggish demand scenario across geographies it operates, mainly in Canada due to the ongoing restrictions on account of the COVID 19 pandemic. Amidst the sluggish macro, the group reported organic growth from its Cold Stone Creamery and Papa Murphy's brand.
• The group reported a total expense of CAD 101.632 million, down from CAD 127.052 million in pcp. The fall was related to lower operating expenses (CAD 86.168 million, v/s CAD 110.049 million in pcp), combined with a significant fall in interest on long-term debt (CAD 3.263 million v/s CAD 5.178 million in pcp).
• Net income stood lower at CAD 13.427 million, as compared to CAD 19.055 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: If the restrictive measures continue to extend, the group might witness lower business days, which would subsequently impact the company’s margins and cash flows.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:  

The group is focusing on capital preservation and repaying of its debt balances, which looks impressive. The group reported availability of CAD 290 million of credit facility and has CAD 39 million of cash on hand, which seems to be sufficient to meet the near-term working capital requirements. Periodical reduction of borrowings resulted in a lower interest expense and subsequently supported the company’s profitability and cash flows. Notably, cash from operating activities stood at CAD 31.3 million in Q1FY21, up 1% on a y-o-y basis. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a target upside of single-digit (in percentage terms). For the said purposes, we have considered peers like Jamieson Wellness Inc, Recipe Unlimited Corp etc. Hence, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 58.15 on June 14, 2021.

One-Year Technical Price Chart (as on June 14, 2021). Analysis by Kalkine Group

Goodfood Market Corp.

Goodfood Market Corp. (TSX: FOOD) is a leading online grocery company in Canada, which provides fresh meal solutions and groceries to the retailers via the eCommerce segment. 

Key Highlights:

• Management Updates: On May 12, 2021, the company reported the appointment of Jonathan Roiter as Goodfood’s Chief Financial Officer. He would be entrusted with the day-to-day finance function, overseeing all accounting and finance operations while providing strategic recommendations as per the company’s long-term growth strategies. The group also reported the resignation of Raghu Mocharla from the role of Chief Technology Officer with effect from July 01, 2021.
• Impressive growth in Active Subscriber’s count: The company reported an impressive subscriber’s of around 3,17,000 at the end of Q3FY21, which reflects a surge of 17% on y-o-y basis. The improvement was driven by an ongoing surge in the demand of grocery items as people are opting for online delivery. This has resulted in higher-order value per customers and an increase in repetitive orders, which are key positives.

Q2FY21 Financial Highlights:

• FOOD impresses with its second quarter result, wherein the company posted a 71% y-o-y surge in revenue at CAD 100.654 million. The growth was driven by the expansion of the company’s same-day delivery option across the two new metropolitan cities in Canada. Moreover, the group reported an increase in the average basket size and higher-order frequency, which positively contributed to the company’s topline.
• Gross profit stood significantly higher at CAD 30.636 million compared to CAD 17.816 million in Q2FY20, thanks to an elevated revenue, partially offset by a higher cost of sales.
• The quarter was marked by an increase in selling, general and administrative expense (CAD 31.644 million v/s CAD 21.222 million in pcp), higher depreciation and amortization (CAD 2.353 million v/s CAD 1.066 million in pcp) coupled with a higher net finance cost (CAD 0.540 million v/s CAD 0.218 million in pcp).
• The group reported a net loss of CAD 4.030 million, as compared to a net loss of CAD 3.360 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The group witnessed a surge in the input costs due to a surge in the company’s wages and salaries coupled with higher operational expenses due to expansion of the company’s distribution network. Continuation of the above trend is likely to weigh high on the company’s cash flows and margins.

Stock Recommendation:

The industry is witnessing a surge in the eCommerce traction due to change in consumer preferences, and hence the group has implemented new Goodfood mobile application, which would provide customized product offerings to its customers. The Management seems confident to report strong performance metrics in Q3FY21 and for the rest of the current financial year, supported by the elevated demand from the grocery and meal solutions segment. On the valuation front, the stock is available at an EV to Sales multiple of 1.2x on an NTM basis, which is significantly lower than the industry median of 5.7x. Hence, considering the aforesaid facts, we recommend a ’Hold’ rating on the stock at the closing price of CAD 7.81 on June 14, 2021. 

One-Year Technical Price Chart (as on June 14, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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