Rogers Sugar Inc

Rogers Sugar Inc (TSX: RSI) is a Canada based sugar manufacturing company, which is engaged in refining, packaging, and marketing of sugar and related products.

Q3FY20 Financial Highlights: Rogers Sugar declared its second-quarterly results, wherein the Company posted revenue of CAD 206.147 million, up from CAD 191.448 million in the previous corresponding period (pcp). The quarter was marked by higher consumer sales coupled with improved performance from the US segment, while a sluggish demand from the industrial and liquid segments remained a drag. Sales volume, during the quarter, stood at 172,054 metric tonnes, declined from 180,824 metric tonnes in Q3FY19. However, sales of Maple syrup stood at 14.313 million pounds, improved significantly from 9.325 million pounds in pcp. The quarter witnessed a higher cost of goods sold, which resulted in a lower gross profit of CAD 29.873 million, as compared to CAD 30.741 million. Results from operating activities stood at CAD 12.372 million, against CAD 18.57 million in Q3FY19, primarily attributable to higher administration and selling expenses and distribution expense. Earnings before income taxes stood lower at CAD 8.225 million, as compared to CAD 14.299 million in pcp, partially supported by a lower finance cost. Net earnings stood significantly lower at CAD 5.538 million as compared to CAD 10.432 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: A decline in the sales volume of industrial and liquid segments may pose a challenge. Further, any obstacle in the beet harvest, coupled with supply disruptions, would impact the overall performance of the Company.

Valuation Methodology: Price to Cash Flow Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of RSI stood resilient in the recent past and appreciated ~15% in the last six months. The product of the company comes under 'essential commodities'; hence we expect uninterrupted operations in coming quarters. The quarter was marked by increased retail demand driven by COVID-19 related pantry loading and higher export volumes coupled with new tariff quotas which fueled to increased sales to the US. Market conditions remain favourable for the sugar business and, despite the COVID-19 pandemic and the challenges related to a smaller crop in Taber, the group expects that the Sugar segment is likely to exceed last fiscal year's volume and adjusted EBITDA. On the liquidity front, the company reported outstanding revolving credit facility at CAD 190.0 million, which seems sufficient to withstand the current operating environment. Meanwhile, the company confirmed that it has no repayment till June 28, 2024, which is a key positive. The company has returned ~CAD 9.4 million to shareholders during the quarter, which includes CAD 9.3 million in the form of dividends and CAD 0.1 million was through share repurchases. At the last traded price, the stock was offering a dividend yield of ~7.4%, which is lucrative amidst the current interest rate environment. We have valued the stock using the Price to Cash Flow based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered industry (Food & Tobacoo) median on NTM basis. Hence, considering the aforesaid facts and current price movement, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 4.87 on October 05, 2020.

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

Exco Technologies Limited

Exco Technologies Limited (TSX: XTC) designs and manufactures moulds, dies, components and assemblies, and consumable equipment which is used for several industries such as diecast, extrusion, and automotive industries. The Company operates through two business segments, namely, Casting & Extrusion segment and Automotive Solutions segment.

Q3FY21 Financial Highlights: XTC declared its quarterly results, wherein revenue stood at CAD 70.962 million, as compared to CAD 119.944 million in the previous corresponding period (pcp). The slide in the revenue was due to a 60% y-o-y decline in the Automotive Solutions revenue to CAD 28.2 million, coupled with a 13% lower revenue from the casting and extrusion business. The automobile industry remained sluggish during the month of April and May 2020 due to a halt in the overall production levels on account of tepid consumer demand. The business witnessed better than expected performance from Large Mould group due to the continuation of relatively long cycle despite the vehicle production stoppage at all OEM’s served by the group, which supported the overall performance. Adjusted EBITDA stood lower at CAD 4.68 million, as compared to CAD 14.483 million in Q3FY20. Exco reported a net loss of CAD 0.848 million, against a profit of CAD 7.477 million in pcp, primarily attributable to a declining performance from all the segments.

Q3FY21 Income Statement Highlights (Source: Company Reports)

Risks: Due to COVID-19 pandemic, the Automotive segment took a hit due to lower consumer spending across the globe, which led to a fall in the Original Equipment Manufacturers (OEM) production levels. Continuation of the above trend would lead to the suppressed top line, as the Company derives a significant amount of revenue from the segment. Further, the second wave of the novel virus might affect the group’s performance.

Valuation Methodology: Price to Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of XTC appreciated ~24% in the last six-months, as the overall automobile industry is witnessing improved demand prospects. With a revival in the overall Economic activities, the business witnessed demand pick up and reported an improved June sale, which is encouraging. During the quarter, the Management took prudent measures like implementing work share arrangements, restraining expenses, temporarily laying off workers and claiming additional support programs from the government in order to secure cost optimizations. The group expects that combined OEM production levels across Europe and North America are likely to normalize at ~90% of FY20 levels and is likely to remain elevated in the coming quarters. Further, the governments across the states are allowing reopening of the production activities, we expect the demand for the group’s offerings to improve in the near to medium term, which is a key positive and would support the company’s overall performance. The company is focusing on its product development, sales and marketing efforts to improve its market share, and is prioritizing to meet the future demand from OEM’s, which is impressive. Despite the challenging time, the group continued to pay the dividend, which is encouraging from an income investor’s standpoint. At the last traded price, the stock was offering a dividend yield of 5.7%, which is lucrative amid the current interest rate environment. We have valued the stock using the P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like China Automotive Systems Inc, Strattec Security Corp, Xpel Inc etc. Hence, considering the above-mentioned facts, current price levels, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 6.71 on October 5, 2020.

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

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