Canacol Energy Ltd.

Canacol Energy Ltd. (TSX: CNE) is a natural gas exploration and production company which operates across the Colombia region. 

Key Highlights:

• Lucrative Dividend yield: The Corporation declared a dividend of CAD 0.052 per share, totaling CAD 7.4 million, which was paid on April 15, 2021 to shareholders of record at the close of business on March 31, 2021. Moreover, at the last closing price, the stock was carrying an impressive dividend yield of ~6.3%, which is lucrative amid low interest rate environment.

• New Exploration Opportunity: The Aguas Vivas 1 exploration well was spud on May 23, 2021 and reached a total depth of 7,852 feet measured depth on May 29, 2021. The well encountered 412 feet true vertical depth of net gas pay with an average porosity of 22% within the Cienega de Oro sandstone reservoir, the primary target. The Corporation is currently casing the Aguas Vivas 1 well in preparation of production testing and the well will be tied into existing production infrastructure within the next two weeks. The Corporation plans to immediately drill at least two appraisal wells back-to-back in order to prove up the extent of the new discovery.

• Improving Dynamics despite challenging macros: The company has reported encouraging exploration and drilling activities in the recent past, which reports a whopping ~33% CAGR growth of proved reserves in the last seven years, while the industry’s proved reserves are on the downtrend. This has placed the company as one of the largest players across Colombia. The overall gas supply across the industry has remained sluggish in the recent past and is expected to decline in the coming years. However, CNE’s supply is expected to remain elevated in the coming days, supported by a strong reserve base.                               

Source: Company Presentation

Q1FY21 Financial Highlights:

• CNE declared its first-quarter result, wherein the group reported total revenue of USD 75.091 million, lowered from USD 82.287 million in the previous corresponding period (pcp). Realized contractual natural gas and liquefied natural gas sales volumes decreased 12% on y-o-y to 177.6 MMscfpd.
• Total expenses stood higher at USD 52.590 million from USD 50.051 million in pcp. The period was marked by lower transportation expenses (USD 9.273 million v/s USD 11.293 million in pcp), a lower depletion and depreciation (USD 16.903 million v/s USD 17.954 million in pcp), partially offset a slightly higher operating expense (USD 4.704 million v/s USD 4.466 million in pcp).
• Income before income taxes was recorded at USD 14.075 million, as compared to USD 24.892 million in Q1FY20. The decline was primarily due to lower revenue coupled with higher expenses.
• Net loss reduced to USD 3.062 million, from a net loss of USD 25.988 million in Q1FY20.        

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s operations are correlated with the prices of oil & gas.Hence, a voltility in the commodity prices would affect the company’s overall realization and cash flow.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company is well placed to generate stable cash flows from its operations. Moreover, the group do not have any major debt repayments till FY24, which lowers the company’s immediate burden of repayment. Additionally, the group is the largest supplier to the Caribbean Coast and derives a competitive cost structure, which would subsequently support the company’s profitability and margins. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). Based on technical analysis, the stock has support at CAD 2.7 level. For the said purposes, we have considered industry (Oil & Gas) mean on an NTM basis etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of CNE at the last closing price of CAD 3.31 on June 22, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-Year Technical Price Chart (as on June 22, 2021). Analysis by Kalkine Group

BTB Real Estate Investment Trust

BTB Real Estate Investment Trust (TSX: BTB.UN) is a Canada-based unincorporated, open-ended real estate trust, which owns approximately 64 commercial, office and industrial properties in primary and secondary markets. It operates through four segments: office, commercial, industrial, and general-purpose, with properties in Quebec and eastern Ontario.

Key highlights 

• An income play: The trust has reported a stable dividend payment over the years, aided by consistent cash flows. Recently, it announced a monthly cash distribution of CAD 0.025 per unit for June 2021, representing CAD 0.30 per unit on an annualized basis. Moreover, at the last closing price, the stock was offering a dividend yield of ~7.2%, which is lucrative considering the current interest rate scenario.

• Rent collections remain Strong:Despite the challenges faced by the evolving events attributable to the pandemic, the trust collected 99.6% of its Q1 2021 invoiced rents, in line with its previous collection record. Rent collection remained strong and the trust reported a significant reduction of the balance of receivable (CAD 5.2 million at the end of Q4 2020 to CAD 4.8 million at the end of Q1 2021).
  

• Healthy occupancy rates:The group reported an impressive occupancy rate of 95.8% in Q1FY21 in the industrial segment V/s 93.6% in Q1FY20. The office segment and the retail segments reported a slight decline in occupancy. On a consolidated basis, the occupancy rate stood at 91.0% V/s 92.4% in Q1FY20. Despite the tepid conditions the trust has solidified its operations throughout the past year and continues to improve the leasing activity, reflects the resilience with solid foundations.

• Healthy leasing activity along with higher average renewal rate: Lease renewal activities were robust in Q1 2021, with the trust renewing leases totaling 95,171 square feet, with 40,694 square feet renewed for leases ending in 2021 and 54,477 square feet renewed for leases expiring in 2022 and beyond. The trust also saw a 5.9% rise in average rent renewal rates in the reporting period, compared to a 4.1% increase in Q1 2020.
  

Financial overview of Q1 2021 (Expressed in thousands of CAD dollars)

Source: Company

• In Q1 2021, the trust posted rental revenue of CAD 23.5 million against CAD 23.8 million in the previous corresponding period.
• On the back of marginally increased total operating expenses at CAD 11.11 million v/s CAD 11.10 million in Q1 2020, the trust reported lower operating income of CAD 12.4 million, against CAD 12.7 million in the previous corresponding period.
• Net income stood at CAD 2.5 million, against a net loss of CAD 5.5 million in pcp. The turnaround was mainly due to the lower financial expenses, partially offset by higher administration expenses.
  

Risks associated with investment

The Company's revenue and operating results depend significantly on the occupancy levels and rent collection. Hence, fluctuations in occupancy levels and delay in rent collection would affect the financial performance.

Valuation Methodology (Illustrative): EV to EBITDA

Stock Recommendation

Despite the challenging environment on account of COVID-19 pandemic, the trust continues to exhibit stability in the first quarter of 2021 through the diversification of its portfolio, strong rent collection rates, and aggressive lease renewal and leasing initiatives. The REIT's capacity to adapt and embrace change has been a decisive element in its durability over the last year, and we feel it is now ready to embrace the changes and possibilities that have been made available to them, and it is entering the second quarter with a lot of confidence. Furthermore, the stock offers a dividend yield of 7.143%, which is lucrative for long-term investors considering the current interest environment. Based on technical analysis, the stock has support at CAD 3.4 level. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 4.13 on June 22, 2021. We have considered Boardwalk REIT, Inovalis REIT, TrueNorth Commercial REIT as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-Year Price Chart (as on June 22, 2021). Source: Analysis by Kalkine Group

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

Disclaimer

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