Atco Ltd

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

Key highlights

• An Income play:The Company has an excellent track record of dividend distribution and has increased its distribution over the years, reflecting resilience and healthy cash flow generation. Recently, it declared a first-quarter dividend of CAD 0.4483 per share payable on March 31, 2021, increased by 3% over CAD 0.4352.  At the last closing price, the stock is offering a dividend yield of ~4.7%, which is decent amid low interest rate environment.

• Changing electricity generation portfolio:The company is focused on expanding its renewable electricity generation capabilities. Its associate company “Canadian Utilities” sold the entire fossil fuel-based electricity generation business for aggregate proceeds of CAD 821 million, consisting of 12 coal-fired and natural gas-fired electricity generation assets generating approximately 2,300 MW.

• Better than industry margin profile:The Company outperformed the industry margin profile, which is a key positive. In FY 2020, the group reported EBITDA margin, operating margin, and a net margin of 45.1%, 27.1% and 12.6%, respectively, which stood higher than the industry median of 37.0%, 22.4% and 10.8%, respectively. 

• Robust liquidity: The on-going steady performance of the company’s operations and constant upgrading in the strength of the balance sheet resulted in total available liquidity of CAD 3.63 billion, including a cash balance of CAD 1.1 billion.

Source: Company 

Financial overview of FY2020

Source: Company

• In FY 2020, the Company posted revenues of CAD 3,944 million, against CAD 4,706 million in the previous corresponding period. The decline in revenue was primarily due to 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. Lower revenues were partially offset by higher global space rental activity in ATCO Structures.
• On the back of lower revenues, the company posted its operating profit of CAD 1070 million, compared to 1,557million in the previous corresponding period, partially offset by lower operating expenses.
• Net earnings stood at CAD 497 million in FY 2020, against 1,007 million in FY 2019, due to above stated reasons.

Risks associated with investment

The Company is under various market risks in the ordinary course of operations that could impact its earnings and cash flows. Some important risk factors include lower demand, lower production, adverse weather conditions etc. Foreign currency volatility risk is also associated with the Company as Company is present in many geographies.  

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 business expects to benefit from the improved realization prices. The company has a concrete financial strength, with a total available liquidity of CAD 3.63 billion. Furthermore, the industry-beating margins of the company reflect the resiliency of the business. Also, a consistent dividend-paying company, with a decent dividend yield tends to remain under the radar of investors seeking quality for the long-term horizon. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 38.44 on March 8, 2021. We have considered Hydro One Ltd, Fortis Inc, TC Energy Corp, etc. as the peer group for the comparison.

1-Year Price Chart (as on March 8, 2021). Source: Refinitiv (Thomson Reuters)

Evertz Technologies Limited

Evertz Technologies Limited (TSX: ET) is an equipment provider to the television broadcast telecommunications and media industries. The Company designs, manufacture and markets video and audio infrastructure equipment for the production, post-production and transmission of television content.

Key highlights 

• An Income play:Despite the challenging environment, the company maintained its dividend distribution, reflecting its financial strength and suggests that the group is a friend of income investors. Recently, the company announced a quarterly dividend of CAD0.18 per share, payable on March 19, 2021. Moreover, at the last closing price, the stock was offering a dividend yield of ~5%, which is lucrative, considering the current interest rate environment.

Source: Refinitiv (Thomson Reuters)

• New contract win: Recently, the company informed that it has received a purchase order by a Major US Broadcaster totalling in excess of CAD 21 million for delivery of Evertz solutions. We believe this order would further boost the company’s revenue and margins.

• Acquired Studer’s strategic assets: The company recently acquired Studer brand, technology and related assets from HARMAN International. Moreover, the company would invest in Studer to develop next-generation products to meet broadcast customers' future needs while creating synergies between its current product suite and the Studer product environment. 

• Better than industry margin profile:The group outperformed the industry margin profile, which is a key positive. In Q3 2021, the group reported Gross margin, operating margin, and a net margin of 56%, 15.4% and 11.2%, respectively, which was higher than the industry median of 54.4%, 12.6% and 8.4%.

• Improving market scenarios: The Company believes the effects of pandemic to be temporary, as there were signs of improvement in the past two quarters. The group is well-positioned to benefit from an economic revival and the industry transition to IP and Cloud-based solutions. Moreover, the company would continue to maintain the financial flexibility needed to fund, working capital needs and investment opportunities in the foreseeable future.

Financial Overview of Q3 2021 (In thousands of CAD)

Source: Company

• In Q3 2021, the company reported revenue of CAD 92.7 million, compared to CAD 121.2 million in the previous corresponding period. The revenue decreased mainly due to travel restrictions and the postponement or cancellation of sporting and other live events and various other related projects.
• The company posted a gross margin of CAD 52 million compared to CAD 67.8 million in the previous corresponding period. Gross margin % of sales remained same to 56% against pcp.
• The company’s net earnings stood at CAD 10.3 million, compared to CAD 19.4 million in Q3 2020. The decrease in net earnings was mainly due to lower revenue.

Risks associated with investment

Prolong delay in the project execution may lead to a slide in revenue, followed by a lower cash flow. Further travel bans and cancellations of sports events, other live events, and various other related projects may also lead to a fall in the Company's order book.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock recommendation

The Company caters to the IT segment and offers innovative offerings across software, equipment, and technology segments. Furthermore, the IT and cloud business has grown drastically in the recent past and is expected to retain the momentum driven by a shift in business, changing consumer preferences etc. Furthermore, recently the Company received a purchase order by a Major US Broadcaster totalling in excess of CAD21 million, which is a key positive. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 14.4 on March 8, 2021. We have considered CGI Inc, EXFO Inc, Harmonic Inc, etc. as the peer group for the comparison.

1-Year Price Chart (as on March 8, 2021). 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.