First National Financial Corporation

First National Financial Corporation (TSX: FN) is the parent company of First National Financial LP, a Canadian originator, underwriter, and servicer of predominantly prime residential and commercial mortgages.

The company announced a monthly dividend payment of CAD 0.1625 per common share, payable on October 15, 2020.

Q2FY20 Financial Highlights: FN announced its second-quarter results, wherein revenue increased 3% on y-o-y basis to CAD 344.6 million. Furthermore, increased mortgage origination combined with wider mortgage spreads contributed to the increase in placement fee revenue, which subsequently supported the topline. Placement fees soared 47% to CAD 88.7 million, underpinned by the increased mortgage spreads and the crystallization of higher mortgage rate single-family commitments. Meanwhile, mortgage servicing income remained stable during the quarter and was up 5% y-o-y to CAD 41.0 million due to growth in revenue earned on the company's underwriting and fulfilment processing services business. On the flip side, commercial segment mortgage renewals stood at CAD 510 million, down 23% on y-o-y basis. The company reported a slide in the mortgage investment income by 22% on y-o-y basis to CAD 17 million. The company reported a higher income before income tax at CAD 68.944 million, as compared to CAD 60.264 million in Q2FY19.

Q2FY20 Financial Highlights (Source: Company Reports)

Key Risks: Commercial segment origination decreased by 17% on y-o-y basis due to subdued Auto demand and continuation of the trend might lead to another sluggish quarter. The group might see a delay in loan repayment from consumers on account of a fall in consumer’s income, which would hamper the financial performance.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation: The stock of FN corrected ~16% so far this year. The company reported better than expected results aided by a Single-family origination. The company's diverse funding sources have helped in sustaining the ability to offer competitive mortgage products across the country, which is a key positive. The company expects a strong third quarter aided by substantially higher seasonal residential origination, coupled with improved productivity from the company's work from home strategy. The company expects the origination in the commercial segment to be lower but with a higher spread, which is encouraging. On the funding side, the sector witnessed strong demand from institutional investors due to a substantial amount of liquidity in the financial system, which is a key positive. Further, the group continue to distribute dividend amid the challenging operating environment, which is encouraging from an income investor's point of view. At the last traded price, the stock was offering a dividend yield ~6.1%, which is lucrative considering the current interest rate environment. The stock of FN recovered from its recent low and soared ~43% in the last six months. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered TMX Group Ltd, Genworth MI Canada Inc etc., as a peer group. Hence, we recommend a 'Buy' rating on the stock at the closing market price of CAD 32.01 on September 30, 2020.

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

Finning International Inc.

Finning International Inc. (TSX: FTT) is a leading dealer and distributor of heavy-duty machinery and parts under the brand called Caterpillar. The Group sells and rents Caterpillar machinery primarily to the mining, construction, petroleum, forestry, and power system application industries.

Q2FY20 Financial Highlights: FTT announced its quarterly results, wherein the company posted significantly lower revenue of CAD 1,419 million as compared to CAD 2,137 million in the previous corresponding period (pcp). The decline was majorly attributable to a 24% slide in Canada’s product support revenue, as many customers parked equipment fleets and temporarily suspended their operations on account of low commodity prices and government restrictions. However, free cash flow stood higher at CAD 312 million, against a cash outflow of CAD 162 million. The company reported EBITDA at CAD 130 million, as compared to CAD 213 million in pcp while EBITDA margin fell to 9.7% from 10.7% in Q2FY19. On the other hand, the company reported a lower SG&A expense due to effective cost management and lower variable costs. The business received a wage subsidy of CAD 64 million during the quarter, which was included in other income. Net income stood at CAD 18 million, reflecting a significant fall of 79% from Q2FY19.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: The second wave of COVID-19 might affect the operations of oil & gas and mining industry players. Players from these industries are the key customers for the group. Hence, any such scenario would hamper the group’s performance.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation: The stock corrected ~20% so far this year amid volatility in the equity market on account of Covid-19 pandemic. Due to a sluggish industrial scenario, the company witnessed an overall reduction in customer demand as there was a delay or suspension in the client’s activities. The company took prudent measures like improving execution in South America, lowering the cost base in Canada, positioning to capture HS2 opportunities in the UK, and reducing the finance costs. The group mentioned that the market had shown sign of recovery since May, with notable increases in the rental activity, machine utilization hours, and product support revenue run rates. With the recent recovery in oil prices, most oil sands producers have put their truck fleets back to work and are expected to be operating at pre-COVID-19 levels by the end of August. The price of copper has also improved, providing continued support and stability for copper mining in Chile. In the UK and Ireland, construction and power systems projects have resumed, and earthmoving work on the High-Speed Rail 2 mega-project, which represents a significant opportunity for the group. We expect, the demand for oil and gas and mining activities are likely to accelerate and would return to normalcy with improved demand from the re-opening of manufacturing and industrial activities. The stock moved ~42% in the last six months and traded above its 200-days simple moving average (SMA) of CAD 19.61, indicating a bullish trend. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a target upside of lower double digit (in percentage terms). For the said purposes, we have considered industry (industrials) average on next-twelve months (NTM) etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 20.36 on September 30, 2020.

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

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