Restaurant Brands International Inc.

Restaurant Brands International Inc. (TSX: QSR) is one of the world's leading quick-service restaurant companies with over 27,000 restaurants in more than 100 countries. The Group operates through its well-established brands like TIM HORTONS or TH, BURGER KING or BK, and POPEYES or PLK.

Q2FY20 Financial Updates: QSR declared its quarterly results, wherein the Company posted total revenue of USD 1,048 million, significantly lower than USD 1,400 million recorded in the previous corresponding period (pcp). The lower revenue was primarily attributable to a decline in system-wide sales at Tim Hortons and Burger King coupled with a decrease in supply chain sales, partially offset by an increase in system-wide sales at Popeyes. A weak Canadian dollar further dampened the total income during the quarter. The Company reported its adjusted EBITDA at USD 358 million, as compared to USD 580 million in the previous corresponding quarter. Net income attributable to the common shareholders and non-controlling stood at USD 163 million, as compared to USD 257 million in the previous corresponding quarter.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: A further outbreak of the novel virus might result in the restaurant closure. Any such scenario would hinder the overall performance of the company.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation: QSR stock corrected ~32% in the last one year, amid volatility in the global equity market. The company's operations have been significantly impacted by the COVID-19 global pandemic, while the company expects a substantial improvement in business performance in the coming days, driven by the gradual opening of restaurant services across the different regions in which the company operates. Further, the company is focusing on other service modes like drive-through, delivery, and take-out, augurs well for sustaining its top-line. The company expanding its digital channels and investments in digital channels, drove meaningful incremental sales in the quarter. Digital sales across brands grew over 120% year-over-year, and more than 30% quarter-over-quarter. By the end of the quarter, the group reached 90% of prior year system-wide sales with 93% of restaurants open worldwide. With guidance from the Local Governments, the company is reopening its dining segment across numerous countries and regions, which is a key positive. Going forward, the company would invest in its product quality, service, brand marketing and digital platforms, which is impressive. Notably, the company is also working closely with several restaurant owners around the world to build strong pipelines and restart its global development engine. The company has a healthy balance sheet and has three well- established brands with well-capitalized systems, to support its future growth supported by the gradual reopening of the economy. Further, the group continues to distribute a dividend, and at the last traded price, the stock was offering a dividend yield of 3.91%, which is lucrative considering the current interest rate environment. We have valued the stock using Price to CF based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered peers like Mcdonald's Corp, Chipotle Mexican Grill Inc, Yum! Brands Inc etc. Hence, considering the above facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 70.67 on August 31, 2020.

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

Bank of Nova Scotia

Greater Client Activity and Improved Conditions in Capital Markets: Bank of Nova Scotia (TSX: BNS) is known as Canada's international bank and is a provider of global financial services.

Quarterly Performance (For the Period Ended 31 July 2020): During the three months ended 31 July 2020, the bank reported strong capital and liquidity ratios and has reserved conservatively for estimated future loan losses. Despite the global impact of the pandemic, the bank reported decent results. During the quarter, net income stood at CAD 1,304 million as compared to CAD 1,984 million in the pcp and diluted earnings per share was CAD 1.04 relative to CAD 1.50 in the pcp. In the same time span, return on equity was 8.3%. The results were significantly impacted by higher loan loss provisions of CAD 2,181 million. Global Banking and Markets delivered a decent quarter with reported earnings of CAD 600 million, reflecting an increase of 60% over the pcp. This growth was driven by greater client activity and improved conditions in capital markets.

Quarterly Financial Performance (Source: Company Reports)

Key Risks: The investors are advised not to place an undue reliance as the bank is exposed to a variety of risk factors including the risks related to general economic and market conditions, changes in currency and interest rates; increased funding costs and market volatility, the introduction of new products and services, etc.

Valuation Methodology: Price to Earnings Multiple Based Illustrative Relative Valuation (Illustrative)

Price to Earnings Multiple Based Illustrative Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The Bank reported a healthy Common Equity Tier 1 capital ratio of 11.3% and a liquidity coverage ratio of 141%, positioning it well to support its customers, maintain its dividend, and grow across the footprint. The bank will host Canadian National Railway Co. virtual fireside chat on 2 September 2020. As per TSX, the stock of BNS is inclined towards its 52-weeks’ low level of CAD 46.38, proffering a decent opportunity for the investors to enter the market. At the last traded price, the stock was offering a dividend yield of 6.39%, which is lucrative considering the current interest rate environment. The stock of BNS gave a return of 3.18% in the last one month. We have valued the stock using the P/E multiple based illustrative relative valuation and have arrived at a target upside of lower double-digit (in percentage terms). Considering the current trading levels, decent returns in the past three months, decent capital and liquidity position and key risks, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 56.37 on 31 August 2020.

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

Disclaimer

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