Hydro One Limited

Stable Financials Enable Company to Respond to the Challenges: Hydro One Limited (TSX: H) operates regulated transmission and distribution assets in Ontario. As on 08 May 2020, the market capitalization of the company stood at CAD15.26 billion.

First Quarter Highlights (For the Period Ended 31 March 2020): During the quarter ended 31 March 2020, the company demonstrated its financial stability and flexibility and reported an increase in revenue to CAD1,850 million from CAD1,759 million. In the same time span, the company saw growth in net income to CAD225 million, up from CAD171 million in the pcp. This resulted in an EPS of CAD0.38 compared to EPS of CAD0.29 in the prior year. During the quarter, Hydro One Limited reported an increase of 29% in ongoing productivity savings to ~CAD45 million. The productivity improvements are a result of ongoing work undertaken in the areas of supply chain optimization, corporate costs reduction, and fleet optimization. The decent financial and operational performance enabled the Board to declare a quarterly cash dividend of CAD0.2536 per share, which is to be paid on 30 June 2020.

Quarterly Financial Performance (Source: Company Reports)

Growth Expectations: The company is building on its strong foundation and stable financials. It is focusing on operational excellence and is likely to meet the needs of its customers and communities. The company has also received regulatory approval for the acquisitions of Orillia Power Distribution Corporation and the business and distribution assets of Peterborough Distribution Inc. As a result of the spread of the novel strain of the coronavirus, the operations of the company will be dependent on several factors, including the duration of the pandemic and severity of measures implemented to combat this virus.

Valuation Methodology: EV/Sales Multiple Based Relative Approach (Illustrative)

EV/Sales Multiple Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The company has improved reliability in the transmission segment with a reduction of 31% in the System Average Interruption Duration Index (SAIDI). The stock of Hydro One Limited has given a return of 17.62% in the past one year. Considering the decent financial performance, returns in the past one year and its operational excellence, we have valued the stock using EV/Sales multiple based relative valuation approach and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered Canadian Utilities Ltd, Emera Inc and Fortis Inc as peers. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD25.57, up by 0.511% on 8 May 2020.

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

Magna International Inc.

Repurchasing Shares and Payment of Dividends: Magna International Inc. (TSX: MG) is an automotive supplier of products including exteriors, interiors, seating, roof systems, body and chassis, etc. As on 8 May 2020, the market capitalization of the company stood at ~CAD16.72 billion.

First Quarter Results (For the Period Ended 31 March 2020): During the quarter ended 31 March 2020, sales of the company tumbled by 18% to USD8.7 billion and adjusted EBIT witnessed a decline and stood at USD403 million. These were negatively impacted due to the coronavirus related customer shutdowns. In the same time span, income from operations before income taxes stood at USD386 million. This resulted in diluted earnings per share of USD0.86. In the first quarter of 2020, MG generated cash from operations before changes in operating assets and liabilities of USD615 million. During the three months ended 31 March 2020, the company also paid dividends of USD121 million and repurchased 4.8 million shares for USD192 million. The company has recently been awarded a 2020 Automotive News PACE Award for its innovative lightweight solutions which succeeded in reaching the market. This product is likely to help automakers meet sustainability goals, including reduced emissions and improved fuel economy.

Quarterly Financial Highlights (Source: Company Reports)

Future Expectations and Growth Opportunities: The company is highly focused on the safe restart of production at various facilities and is confident of recovering from the crisis of COVID-19. The company is in a strong position to capitalize on growth opportunities that may exist in future. Basis on the company’s expectations prior to COVID-19, the operating segments were performing ahead of the company’s expectations. The OEM and supplier final production facilities in China have resumed production while facilities in Europe and North America are expected to return to production in stages over the next few weeks. MG is taking prudent actions to reduce costs and conserve cash.

Valuation Methodology: Price to Cash Flow Multiple Based Approach (Illustrative)

Price to Cash Flow Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock of MG gave a return of 12.53% in the past one month. The company has a strong balance sheet which will allow MG to invest in new technologies to ensure long-term success. The strong liquidity position of the company will allow it to withstand downturns related to COVID-19 and positions the company to benefit from the value-creating opportunities. The stock of MG is currently trading on average trading levels and thus has further potential for growth. Considering the decent returns in the past one month, and its healthy balance sheet, we have valued the stock using the price to cash flow multiple based valuation approach and have arrived at a target upside of lower double-digit (in percentage terms). Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD55.25, up by 3.3483% on 8 May 2020.

MG 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.