First Capital Real Estate Investment Trust

First Capital Real Estate Investment Trust (TSX: FCR.UN) is a developer, owner and operator of mixed-use urban real estate in Canada's populated centres.

Key Highlights:

• Strategic Sale of Properties located in Ottawa and the Greater Montreal Area: Recently, the company announced an agreement to sell a 50% non-managing interest across a diverse portfolio of six grocery anchored properties, and a 100% interest in a portion of the development land at Place Panama on Montreal's south shore, for an aggregate combined sale price of approximately CAD 115 million.
• An Income Play: Amid lower interest rate environment, the stock is offering a lucrative dividend yield of 6.4%, significantly higher compared to 3.4% yield of TSX Composite and 0.70% yield on the Canada 10-year Government Bond, with a consistent track record of dividend payment over the past ten years. For the third quarter of FY20, the company distributed a total dividend of CAD 46.99 million, at par with CAD 47.104 million, a year ago, which reflects a stable financial position of the company.

Dividend Payment History. Source: Refinitiv (Thomson Reuters)

Gaining traction from Retail Segment: The company has maintained prudent portfolio allocation and has the least exposure to gasoline stations and clothing which has been impacted due to the pandemic. The above has resulted in a stable occupancy level. Canada’s retail sales rose for the fifth month in a row during September 2020 and are expected to remain elevated in the coming months, which would help the company in delivering improved financial performance.                                               

Source: Company Presentation

Q3FY20 Financial Highlights:

• The group announced its quarterly results, wherein the company posted CAD 101.478 million of net operating income (NOI), lower than CAD 115.023 million in the previous corresponding period (pcp). The decline was majorly attributable to a lower income from total property rental revenue of CAD 163.952 million, against CAD 183.650 million in pcp.
• Income (loss) before income taxes stood at CAD 9.295 million, as compared to CAD 99.382 million in the previous corresponding period (pcp). The decline was majorly due to a decrease in the value of property investments amount CAD 40.907 million, as compared to an increase of CAD 25.827 million in the previous corresponding period (pcp). Moreover, a lower interest and other income (CAD 2.776 million, versus CAD 11.828 million in Q3FY19) remained as a drag too, which was partially supported by a lower interest expense (CAD 38.951 million versus CAD 45.005 million in pcp).
• The company reported a lower income of CAD 11.080 million, as compared to CAD 78.775 million in the previous corresponding period.
• The group reported a cash and cash equivalent of CAD 22.432 million, while total assets stood at CAD 10,013.445 million.                     

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The company business prospects might get hindered by lower occupancy levels due to continuation of restriction by the state and provincial Governments.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock Recommendation:

The company has ample liquidity levels of CAD 835 million, including cash balance and undrawn credit facilities, which seems sufficient to meet the current working capital requirements and Capex. Moreover, the group has less than 6% of the total debt maturing in FY21, which augurs well for maintaining the liquidity levels. Further, the Management has stated that they have achieved 89% of the target to reduce FY20 operating and capital spending by ~CAD 75 million. Moreover, the stock is yielding higher with 6.4% of dividend yield amid lower interest rate environment with a track record of consistent dividend payment. We have valued the stock using P/E based relative valuation method and have arrived at a target upside of higher double-digit (in percentage terms). For the said purposes, we have considered peers like CBRE Group Inc, Crombie Real Estate Investment Trust etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 13.48 on January 04, 2021.

FCR.UN Daily Technical Chart (as on January 04, 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 while most businesses cut down or suspend their dividend distribution. This shows the group's financial strength and suggests that the group is a friend of income investors. On December 23, 2020, the company paid a regular quarterly dividend of CAD 0.18 per share. Moreover, at the last closing price, the stock was offering a dividend yield of 5.5%, which looks lucrative considering the current interest rate environment.

• Healthy working Capital: Presently, the company had cash and cash equivalents of CAD 110.0 million, compared to CAD 75.0 million, along with working capital of CAD 231.2 million compared to CAD 223.7 million as on April 30, 2020. The Management believes that the current balance in cash plus future cash flow from operations would be sufficient to finance growth and related investment and financing activities in the foreseeable future. The Company also improved its Day sales outstanding in accounts receivable to 69 days compared to 76 for April 30, 2020.

Source: Company 

• Improving market scenarios: The Company believes the pandemic to be temporary as signs, especially in the USA market, have shown improvement as evident in this quarter. The group is well-positioned to benefit from an economic revival and the industry transition to IP and Cloud-based solutions. It would continue to maintain the financial flexibility needed to fund working capital needs and investment opportunities in the foreseeable future. 

Financial overview of Q2 2021 (In thousands of Canadian dollars)

Source: Company

• In Q2 2021 the company reported revenue of CAD 100.5 million, decreased by CAD 19.3 million, compared to CAD119.8 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 59.7 million compared to CAD 69.3 million in the previous corresponding period. Gross margin percentage improved to 59.4% compared to 57.9% in Q2 2020.
• The company’s net earnings stood at CAD 21.2 million, compared to CAD 20.5 million in Q2 2020. The increase was mainly due to low S&A expenses and low R&D expenses partially offset by an increase in other expenses. 

Risks associated with investment

Prolong delay in the project execution may lead to a slide in revenue, followed by a lower cash flow. Continuation of 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 Earnings 

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. The Company believes the pandemic to be temporary as signs, especially in the USA market, have shown improvement as evident in this quarter. Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 13.03 on January 4, 2021, with a double-digit (percentage term) upside potential. We have considered CGI Inc, Vecima Networks Inc, etc. as the peer group for the comparison.

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.