Restaurant Brands International Inc.

Restaurant Brands International Inc. (TSX: QSR) is one of the world's leading quick-service restaurant companies with over 27,000 restaurants in more than 100 countries. The Group operates through its well-established brands like TIM HORTONS or TH, BURGER KING or BK, and POPEYES or PLK.

Recent Highlights:

• The company opened its 300th restaurant in Canada, located in Richmond Hill, Ontario. The store is as per the Burger King’s latest design elements, interactive features such as outdoor digital menu boards.
• Earlier, the company announced that it had modernized the drive-thru experience across than 10,000 Burger King and Tim Hortons locations, with Popeyes beginning its own rollout later this year. 

Q3FY20 Financial Highlights:

• QSR declared its third-quarter results, wherein the company posted a revenue of USD 1,337 million, lower than USD 1,458 million reported in the previous corresponding period (pcp). The decline was majorly attributed to closure of certain stores on account of restrictions imposed due to COVID 19 pandemic. However, growth in system-wide sales due to comparable sales growth of 17.4%, including US comparable sales growth of 19.7%, as well as net restaurant growth of 7.1% partially supported the top-line.
• Income from operations stood at USD 417 million, lower than USD 571 million reported in the previous corresponding period. The decline was majorly attributable to a lower revenue coupled with a higher operating cost (USD 920 million versus USD 887 million in pcp).
• The company reported its net income at USD 223 million, as compared to USD 351 million in Q3FY19.
• The company reported cash and cash equivalent of USD 1,919 million, while total assets were recorded at USD 22,533 million.                    

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Company is exposed to next wave of COVID-19 outbreak, which could weigh on the group’s performance. Also, the company is exposed to currency transitions risks.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation: Due to a temporary closure of restaurants and food-services segment across Canada, the stock QSR corrected ~15% so far this year. The company has shown improved business performance, supported by gradual re-opening of stores coupled with the opening of new stores. The corporation has ample liquidity as it has issued USD 1.4 billion of Second Lien Notes and would issue another USD 1.5 billion of new 4.0% Second Lien Notes if required. The group has strong brand presence and reopening of the existing stores are likely to improve demand offtake in the foreseeable future which would subsequently lead to higher system sales. Further, the stock of QSR is offering a dividend yield of 3.9%, which looks decent given the lower interest rate environment. We have valued the stock using Price to CF based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Mcdonald's Corp, Chipotle Mexican Grill Inc etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 70.21 on November 6, 2020.

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

Atco Ltd

Atco Ltd (TSX: ACO.X) is a Canada-based company, which offers infrastructure solutions to customers around the world. The Company is engaged in the business activities: Structures & Logistics, Canadian Utilities and Neltume Ports.

Key Highlights

Low capital investment: The company brought down its total capital investment by CAD 73 million to CAD 242 million in Q3 2020 on Y-o-Y basis. This low capex is mainly due to delayed capital investment in the Regulated Utilities in 2020 and lower capital investment in Electricity Generation as the company sold their Canadian fossil fuel-based electricity generation business in Q3 2019.

Source: Company Presentation

Track Record of 48 years of annual dividend increases: At the time when most of the business are suspending or curtailing the dividends, the group is increasing its dividend. Recently, the company declared a fourth-quarter dividend on 8th Oct 2020 of 43.52 cents per share or CAD1.74 per Class I Non-Voting and Class II Voting Share on an annualized basis. The group is having a healthy practice of dividend pay-out; this translates in an essential factor for regular income-seeking investors with a long-term horizon.  Further, the company is offering a dividend yield of 4.7%, relatively higher given the lower interest rate environment.

Source: Company Filing,

Financial Overview of Q3 2020 (Fig. In CAD)

Source: Company filing

• Revenues posted by the company in Q3 2020 were CAD 897 million, CAD 200 million lower than the same period in 2019 due to forgone revenue following Canadian Utilities' sale of the Canadian fossil fuel-based electricity generation business in the third quarter of 2019 and subsequent sale of Alberta PowerLine (APL) in the fourth quarter of 2019.

Source: Company Filing

• The company reported adjusted earnings of CAD 54 million or CAD 0.47 per share in Q3 2020, compared to CAD 74 million or CAD 0.65 per share for the same period in 2019. These lower adjusted earnings were mainly due to the above-stated reasons.

Risk associated with the investment

The Company's earnings from its foreign operations are exposed to fluctuations in exchange rates. Regulated Utilities are subject to the normal risks faced by regulated companies. These risks include the regulator's approval of customer rates that permit a reasonable opportunity to recover service costs on a timely basis, including a fair return on rate base.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

The utility segment is likely to remain stable in the coming quarters, as the sector is categorized under “essentials” and the business expects to benefit from the improved realization prices. The company has a concrete financial strength, with a cash position of approximately CAD 1.24 billion as on 30th September 2020 and unused credit facility od CAD 2.54 billion. Further, the stock is offering a dividend yield of 4.7%, with track record of consistent dividend payment over last 49-years, which would bring its stock in the investor’s limelight. Therefore, based on the above rationale and valuation done, we have given a ‘Buy’ rating at the closing price of CAD 37.06 on 6 November 2020. We have considered TC Energy Corp, Capital Power Corp, Emera Inc, etc. as the peer group for the comparison.

ACO.X 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.