Fortis Inc.

Fortis Inc. (TSX: FTS) owns and operates utility transmission and distribution assets across North America and caters to more than 2.5 million electricity and gas customers across North America. Meanwhile, the company has smaller stakes in electricity generation and several Caribbean utilities. 

Key Highlights:

• Industry beating margin profile: The company commands a higher margin than its peers, which indicates better operational efficiency and is a key positive. EBITDA margin and operating margin stood higher at 41% and 26.3%, respectively in Q1FY21, compared to the industry median of 33.4% and 18.4%, respectively. Additionally, the net margin stood at 15.6% in Q1FY21, significantly higher than the industry median of 12.1%.
  

• Stable Dividend payment: The group reported a consistent dividend payment during the last four decades, supported by stable cash flow generation. Moreover, the management highlighted that the company is likely to deliver a cash flow growth of 6% CAGR till 2025, which would support the dividend distribution. Moreover, at the last closing price, the FTS stock was offering a dividend yield of ~3.6%, which is decent considering the current interest rate scenario.                          

Source: Company Presentation

• Encouraging Long-term outlook: The company is focusing on its five-year capital plan to increase midyear rate base from CAD 30.5 billion in 2020 to CAD 36.4 billion by 2023 and CAD 40.3 billion by 2025. This is expected to drive the company’s revenue and suggest strong earnings visibility in the coming years. Moreover, the group is investing in clean energy generation and added 2,400 MW plants in the Wind and Solar segment and a 1,400 MW project based on Battery Storage. Owing to the increasing traction within the clean sources of energy, we believe the above investments are likely to provide impressive yields for the corporation.

Q1FY21 Financial Highlights:

• FTS announced its quarterly results, wherein the group posted revenue of CAD 2,539 million, higher than CAD 2,391 million in the previous corresponding period (pcp). The increase was driven by an increase in rate base growth coupled with an increase in higher short term wholesale sales and new customer rates.
• Operating income improved to CAD 668 million, as compared to CAD 658 million in Q1FY20. The increase was primarily due to higher revenue, partially offset by higher energy supply costs and operating expenses.
• Net earnings stood at CAD 396 million, grew from CAD 353 million in pcp, supported by an elevated operating income and a slightly improved finance charges.

Income Statement Highlight (Source: Company Report)

Risks: The group derives its majority revenue from regulated assets, and due to any strict regulatory norms, the company’s overall performance might get hindered.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company reported robust liquidity of CAD 4 billion through credit facilities and a cash balance, which seems to be sufficient to cater to the working capital needs and capital investments. Moreover, the operations of the Utility sector are resilient in nature, which provides stable earnings growth and consistent cash flow generations. Notably, cash from operations stood CAD 739 million, as compared to CAD 590 million Q1FY21. Based on technical Analysis, the stock has support at CAD 49.2 level. We have valued the stock using the Price to Cash Flow based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Emera Inc, Hydro One Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 55.38 on July 07, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-Year Technical Price Chart (as on July 07, 2021). Source: REFINITIV, Analysis by Kalkine Group

Metro Inc.

Metro Inc. (TSX: MRU) is a retailer, franchisor, distributor, and manufacturer of food and pharmaceutical products. The company operates through a network of 650 drugstores and 950 food stores across Canada.

Key Highlights:

• Industry leading margin: The company commands a higher margin than its peers, which indicates better performance than the industry. In Q2FY21, EBITDA margin and operating margin stood at 9.4% and 6.8%, respectively, higher than the industry median of 5.3% and 3.2%, respectively. Additionally, the company reported its net margin at 4.5% in Q2FY21, as compared to the industry median of 1.90%.
  

• Higher dividend payment amidst sluggish economic growth: The company made a higher dividend distribution in H1FY21 at CAD 118.1 million, compared to CAD 107.7 million in the previous year.
  

• Positive demand outlook: The management expects growing traction from its prescription drugs in the latter half of FY21. Moreover, the company expects its food sales to remain strong through the financial year, which suggests demand level closer to pre-pandemic.

Q2FY21 Financial Highlights:

• MRU declared its second quarter result, wherein the group reported its sales of CAD 4,193 million, slightly higher than CAD 3,988.9 million in pcp. The company reported a 5.5% growth in same-store sales, while the company’s Online food sales increased ~240% from the previous corresponding quarter.
• Operating income before depreciation and amortization stood at CAD 396.1 million, higher than CAD 374.1 million in pcp. The surge was due to a higher income, partially offset by a higher cost of sales and operating expenses (CAD 3,796.9 million v/s CAD 3,614.8 million in pcp). The quarter was marked by higher wages and fringe benefits (CAD 229.6 million v/s CAD 208.3 million in pcp) and increase rents and occupancy charges (CAD 70.3 million v/s CAD 64.3 million in pcp).
• Net earnings stood higher at CAD 188.1 million v/s CAD 176.2 million in pcp.

     Income Statement Highlights (Source: Company Report)

Risks: Due to the ongoing COVID 19 pandemics, the operations remained under the scanner. Any further restriction imposed by the Federal Government might lead to a change in the preference of the consumers.

Valuation Methodology (Illustrative): Price to Earnings  

Stock Recommendation:

The company is working with government authorities to accelerate vaccination efforts through its network of pharmacies, and hence it expects growth in front-end sales, which is a key positive. Moreover, we expect the growth in the eCommerce segment to continue in the coming days, supported by higher dependence on the online delivery segment by the consumers.  Moreover, the company’s services come under the essential segment and hence, is immune to the economic cycles, which is likely to provide stable income. Based on technical analysis, the stock has support at CAD 52.54 level. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like George Weston Ltd, Alimentation Couche-Tard Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 59.75 on July 07, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-Year Technical Price Chart (as on July 07, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV

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.