Exchange Income Corporation

Exchange Income Corporation (TSX: EIF) is a diversified, acquisition-oriented corporation focused on opportunities in aerospace and aviation services and equipment, and manufacturing activities. The company operates through two major segments, namely, Aerospace & Aviation and Manufacturing.

Recently, the Company acquired Window Installation Specialists, Inc., a U.S. based Company at a price consideration of USD 45 million.

Q2FY20 Financial Highlights: EIF declared its quarterly results, wherein the Company posted weak performance due to the challenging scenario of the Aerospace segment across the Globe. Revenue plunge ~25% on y-o-y basis to CAD 243.7 million. However, the negative from the Aviation segment has been offset by an improved performance from the manufacturing segment. Revenue from the manufacturing segment grew 19% on y-o-y basis, aided by the positive impact from the acquisitions of AWI and L.V. Control in the fourth quarter of FY19.  The Company reported a 29% y-o-y decline in EBITDA to CAD 62.075 million, primarily attributed to a decline in the passenger volume in the recent past on account of travel restriction. Net earnings of the Company came in lower at CAD 5.645 million, reflecting ~88% decline from the previous corresponding quarter. Free cash flow stood at CAD 42.3 million compared to CAD 65.7 million in the previous corresponding quarter.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: A major part of the revenue is being derived from the aviation segment, and the recent restrictions imposed on account of the pandemic has caused a tremendous impact on the aviation segment. Continued pain in the aviation sector might hinder the group’s performance.

Valuation Methodology: EV to Sales Based (Illustrative)

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

Stock Recommendation: The stock surged ~15% and ~43% in the one month and three months, respectively following a recovery in the equity market. The drastic fall in the aviation sector on account of travel restrictions has resulted in a suppressed performance for most aviation companies across the globe and EIF is no exception. The company reported a revival in the operations on account of easing out of travel restrictions across several parts of North America, which is impressive. Operating capacity revived to 40% to 60% from earlier 10% to 15% capacity during March 2020, which is a key positive. The group expect the capacity level to further increase in the near term. The company acquired Window Installation Specialists, Inc. and secured 10-year Netherlands Defence Contract, which ensures stable cash flows in the coming quarters. We expect the pressure on the profitability is expected to continue in the coming days on account of higher input costs. However, the increase in aviation capacity along with improved dynamics from the manufacturing segment is likely to drive the operating performance of the company in the coming quarters. The EIF stock has closed above the 50-days and 100-days simple moving average of CAD 27.56 and CAD 25.40, respectively, indicating a bullish trend. Further, the group continue to distribute the dividend amid the challenging time. At the last traded price, the stock was offering a dividend yield of 7.4%, which is lucrative considering the current interest rate environment. We have valued the stock using the EV to sales based relative valuation approach and arrived at a target price, which suggests a double upside potential (in % terms). For the said purpose, we have considered peers Air Canada, Bombardier Inc. and CAE Inc etc. Hence, considering the aforesaid facts and current price movement, we recommend a ‘Speculative Buy’ recommendation on the stock at the closing market price of CAD 30.91 on August 18, 2020.

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

H&R Real Estate Investment Trust

H&R Real Estate Investment Trust (TSX: HR.UN) is one of Canada’s leading REITS with total assets of and is engaged in owning and managing of real estate portfolio including industrial, retail, office, and residential properties across North American market. The Company derives the majority of its income from the Canadian properties while H&R's offices contribute to most of its total revenue.

Q2FY20 Financial Highlights: HR.UN declared its quarterly results, wherein the Company reported a  decline in rental income at CAD 269.9 million as compared to CAD 287 million in the previous corresponding period (pcp), primarily attributable to is net disposition activity over the past 18 months. Property operating income stood at CAD 163.6 million as compared to CAD 187.1 million in Q2FY20. However, operating income from Same-Asset property across H&R's office, industrial and residential segments increased by 3.8%, 7.2% and 15.3%, respectively. Net income plunged to CAD 35.8 million against CAD 109.6 million in pcp, primarily attributable to an extended loss from fair value adjustment on real estate assets amounting CAD 57.7 million as compared to a loss of CAD 27.3 million in pcp combined with higher provision for bad debts. The Company posted lower funds from operations at CAD 115 million against CAD 128.2 million in pcp.

Q2FY20 Financial Snapshot (Source: Company Reports)

Risks: Due to the ongoing pandemic, non-essential businesses are going through challenging times, while people are facing barriers like loss of jobs, salary-cut etc. The above phenomenon is might dampen the rent collection of the Group.

Valuation Methodology: EV to EBITDA Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock dipped ~51% so far this year amid volatility in the equity market on account of COVID 19. The company has strong liquidity and to ensure further support; the company secured a CAD 500 million unsecured line of credit. H&R's high-quality, long-term leased office portfolio delivered strong rent collection consistent with the profile of the tenant base, where 86.6% of tenants are investment-grade.  Rent collection was also strong in H&R's industrial and residential portfolios, reflecting the stronger-than-average credit profile of the REIT's tenant base across both of these portfolios. In the Retail segment, rent collection has improved in July and August as most tenants have been able to resume operations. Furthermore, the company arranged a new CAD 100 million secured mortgages on a previously unencumbered property, maturing in 2029. We believe, the above funds are likely to help the group in surpassing the current challenging time. The company is constructing five residential properties and one mixed-used property and has an ongoing development of in River Landing, an urban in-fill mixed-use development site in Miami, comprising ~1,000 feet of waterfront on the Miami River. The above product-line is expected to deliver improved business prospects in the coming days.  Further, at the last traded price, the stock is offering a dividend yield of ~6.71%, which is lucrative considering the current interest rate environment. The stock gained ~19% in the last three months, outperforming the index by ~5%. We have valued the stock using EV/EBITDA multiple based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered Artis Real Estate Investment Trust (TSX: AX.UN), Crombie Real Estate Investment Trust (TSX: CRR.UN) and Choice Properties Real Estate Investment Trust (TSX: CHP.UN) etc. as a peer group. Hence, we recommend a 'Buy' rating on the stock at the current market price of CAD 10.2 on August 18, 2020.

HR.UN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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