K-Bro Linen Inc

K-Bro Linen Inc (TSX: KBL) is a Canada-based owner and operator of laundry and linen processing facilities. The company provides laundry and linen services to healthcare institutions, hotels and other commercial accounts.

Key highlights

• Capex plans curtailed: Earlier for FY 2020, the company had anticipated capital spending of approximately CAD 5.0 million on a consolidated basis. However, considering the current crisis, they planned to have a capital spending of about CAD 3.0 million, because of the deferral of the Corporation’s plan to implement an enterprise-wide operating system.

• Positive outlook for the healthcare segment: The management believes the prospects for the Corporation’s healthcare business remains strong in the medium-to-long-term. By providing integral laundry and linen processing services to the hospitality and healthcare sectors, the Corporation has been designated an “essential” service in the jurisdictions in which it operates, which has allowed the Corporation’s facilities to remain open and continue “normal” operations. The company expects to post an adjusted EBITDA margin before the adoption of IFRS 16 in the range of 12% to 16% for FY2020.

• Long term contracts to provide stable and recurring revenue: The company is managing stable and recurring revenue from the long-term contracts they have. Almost 57% of Canada-based revenue is secured under these contracts that extend to 2023 and beyond.

• Dividend: Despite the challenging operating environment, the group continued with dividend distribution and declared a dividend of CAD 0.30 per share. At the last traded price, the stock was offering a dividend yield of ~3.7%, which is decent amid low-interest rate environment.

Financial overview of Q3 2020:

Source: Company

• In Q3 2020, the company’s reported consolidated sales numbers decreased 24% to CAD 51.4 million compared to CAD 67.8 million in the previous corresponding period (pcp), primarily due to lower occupancy rates across the hospitality sector due to COVID-19 pandemic.
• EBITDA reported by the company decreased by CAD 1.9 million in Q3 2020, to CAD 12.7 million compared to CAD 14.6 million in the previous corresponding period, attributed to the reduced hospitality volume, offset by the government assistance received – CAD 2.1 million from Canadian Government and CAD 1.1 million from UK government.
• Net earnings posted by the company decreased by CAD 1.2 million to CAD 3.4 million in Q3 2020, compared to CAD 4.7 million in Q2 2019.

Risk associated with investment

Since the company provides its services to the hospitality sector and commands a significant part of the revenue from it, continuation of the travel ban is likely to impact on the cash generation capacities of the business. Other key risks associated with the company include utility costs, minimum wage legislation and labour costs, renewable of contracts risks, textile demand, volatility in foreign exchange rates, etc. 

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock recommendation

During the quarter, as the healthcare volumes began to return to more specific numbers, we believe the prospects for the group’s healthcare business remains firm. The group expects its consolidated adjusted EBITDA margins in a range of 12% - 16% for FY 2020. The strong balance sheet will enable the group to operate without disruption in Canadian and UK markets. Also, with the easing lockdown restrictions, we expect a gradual recovery in the hospitality sector, which could support the overall performance of the company. Therefore, based on the above rationale and valuation, we have given a ‘Speculative Buy’ rating at the closing price of CAD 32.5 on November 13, 2020, with lower double-digit upside potential. We have considered CareRx Corp, Knight Therapeutics Inc, Park Lawn Corp, etc. as the peer group for the comparison.

KBL daily technical chart. Source: Refinitiv (Thomson Reuters)

Canacol Energy Ltd

• Canacol Energy Ltd (TSX: CNE) is a natural gas and oil exploration and producer in Colombia and Mexico. The corporation holds an interest in Oleoducto Bicentenario de Colombia which owns a pipeline system that focuses on linking Llanos basin oil production to the Cano Limon oil pipeline system.

Key Highlights:

• During October 2020, the group repurchased 762,800 shares at an average price of CAD 3.47 per share.
• The company is the largest Natural Gas Producer in Columbia and focuses on conventional natural gas pure play. The company is well poised as the only active onshore gas operator with an impressive cost structure.
• The company has long term take or pay contracts which enables near-zero exposure to commodity prices and subsequently results in high operating margins and strong Cash Flow Generation.
• On November 11, 2020, the company announced that Mr Oswaldo Cisneros, who served as a non‐executive director of CNE since 2015, has passed away.
• Realized contractual natural gas sales (which are essentially gas produced, delivered, and paid for) for the month of October averaged approximately 173 million standard cubic feet per day ("MMscfpd"), up from approximately 168 MMscfpd reported during the month of September 2020.

Q3FY20 Financial Highlights:

• CNE announced its quarterly results, wherein the company posted revenue of USD 64.474 million, slightly higher than USD 63.646 million in the previous corresponding period (pcp).
• The quarter was characterized by a ~30% y-o-y fall in Brent crude prices, which stood at USD 43.32/bbl.
• Total expense stood higher at USD 38.841 million, as compared to USD 34.553 million, a year ago, due to a higher operating expense, increase in transportation expenses and general and administrative costs, coupled with a significant rise in other expenses.
• Net income stood at USD 14.864 million, as compared to USD 20.266 million in Q3FY19.
• Cash and cash equivalents, at the end of the quarter, stood at USD 93.770 million, while total assets stood at USD 779.560 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s performance is correlated to oil & gas prices. Any volatility in the commodity prices would affect the group’s performance.

Valuation Methodology (Illustrative): P/CF based Valuation Metrics

All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation: The stock of CNE corrected ~17% so far this year, due to a weak sectoral outlook. The stock has closed above its 30-days, 50-days, 100-days and 200-days, simple moving average (SMA), indicating a bullish pattern. The company is a low-cost operator and is focusing on a significant free cash flow generation and enhance its Return on Capital. At the last traded price, the stock was offering a dividend yield of 5.4%, which is lucrative considering the current interest rate environment. We have valued the stock using Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (oil & gas) average on NTM basis. Hence, considering the aforesaid facts, current price movements, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 3.84 on November 13, 2020.

CNE 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.