Restaurant Brands International

Restaurant Brands International (TSX: QSR) is a Canada-based firm. It owns, operates and franchises quick-service restaurants and possesses market recognition. It operates in three segments namely, Tim Hortons; Burger King; and Popeyes Louisiana Kitchen.

Investment Rationale

• Technical Strength: QSR shares are hovering in a long-term as well as short-term bullish zone, as it shares traded well above the crucial long-term as well as short-term support levels of 200-day, 50-day and 30-day SMAs, which implies a strong bullish trend in the stock. Moreover, all the short-term as well as long-term moving averages are moving higher, which is another bullish indicator. Further, 14-day RSI is hovering in a neutral zone with bullish biases at 56.4. Therefore, given the bullish technical indicators, we believe QSR shares are carrying potential for a further upside movement.

Technical Price Chart (as on April 20, 2021). Source: Refinitiv (Thomson Reuters)

• Two Straight Quarters of Topline Growth: After witnessing a blow in the first and second quarter of FY20, due to COVID-19 led lockdown, the company reported improved topline growth in the third and fourth quarter of the FY20. This was largely driven by easing lockdown measure, improving online sales and festive seasons.

Source: Kalkine Group, Refinitiv (Thomson Reuters)

• 96% of the Group’s Restaurants are Functional by the End of Q4FY20: As of the end of December 2020, over 96% of the group’s restaurants were open worldwide, including all of the restaurants in North America and Asia Pacific. At the end of December, approximately 94% of the QSR restaurants were open in Europe, Middle East and Africa. Gradual opening of restaurants would further bolster the group’s financials in next few quarters.

Financial Highlights: FY20

Source: Company Filing

• The year-over-year change in total revenues on reported basis and on organic basis for the full year was primarily driven by a decline in system-wide sales at Tim Hortons and Burger King and a decrease in supply chain sales, partially offset by an increase in system-wide sales at Popeyes. FX movements also contributed to the year-over-year decrease in total revenues.
• The decrease in Net Income Attributable to Common Shareholders and Noncontrolling Interests for the full year was primarily driven by a decrease in Tim Hortons and Burger King segment income, an unfavorable change in the results from other operating expenses (income), net, an unfavorable increase from the impact of equity method investments, and an increase in loss on early extinguishment of debt, partially offset by a decrease in income tax expense, an increase in Popeyes segment income, and a decrease in interest expense.
• The year-over year change in Adjusted EBITDA on reported and on organic basis for the full year was primarily driven by the decrease in Tim Hortons and Burger King Adjusted EBITDA, partially offset by an increase in Popeyes Adjusted EBITDA.
• As of December 31, 2020, total debt was USD 13.0 billion, and net debt (total debt less cash and cash equivalents of USD 1.6 billion) was USD 11.4 billion, and net leverage was 6.1x.
• In the fourth quarter, the group took advantage of favorable market conditions to issue USD 2.9 billion of 4.0% Second Lien Notes due 2030 and redeemed USD 2.8 billion of the company’s 5% Second Lien Notes due 2025. They have also issued USD 750 million of 3.5% First Lien Notes due in 2029 and redeemed USD 725 million of 4.25% First Lien Notes due 2024.

Risk Associated to Investments: Consumer demand would be the most significant issue amidst the uncertainty in the global economy. Further breakout of COVID-19 may result in temporary closures of restaurants in various regions around the world.

Valuation Methodology (Illustrative): EV to EBITDA

*Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Stock Recommendation: Despite a lower sales number reported by the company in FY20 vs FY19, because of unprecedent situation arises, the company is gradually recovering and reported two straight quarter of better revenue performance. However, uncertainty is still hovering over Restaurant sector given the resurgence in the COVID-19 cases in some part of the world. But it seems that next few quarters of bad challenges has been already discounted and that’s why QSR shares are recoding relative outperformance against the broader market. Also, the technical indicators are also favoring the bulls over bears. Therefore, based on the above rationale and valuation, we suggest a “Buy” recommendation at the closing price of CAD 83.31 on April 20, 2021.

1-Year Price Chart (as on April 20, 2021). Source: Refinitiv (Thomson Reuters)

CAE Inc

CAE Inc (TSX: CAE) is a global company focused on delivering training for the civil aviation, defense, security, and healthcare markets. It sells multiple types of simulators and synthetic exercises to the customers, which serve as alternatives for live-training experiences. 

Key highlights

• Closed marketed public offering: The corporation recently completed an underwritten marketed public offering of common stock in the United States and Canada. The group sold 10.45 million shares at a price of USD 27.50 per share, raising roughly USD 287 million in gross proceeds (approximately CAD 360 million). The proceeds would be used to fund a percentage of the purchase price and related costs of acquiring L3Harris Technologies' Military Training business.

• Acquiring L3Harris Technologies' military training business:  Recently, the company signed an agreement to purchase L3Harris Technologies' Military Training business for USD 1.05 billion from L3Harris Technologies (NYSE: LHX). The acquisition is scheduled to close in the second half of 2021. The planned merger offers a huge incentive for value generation. It has the potential to boost the company's growth strategy in Defense and Security, which is highly complementary to its core military training business. It would further broaden the company’s position in the United States. 

• Ample liquidity: On December 31, 2020, the company holds total available liquidity of approximately CAD 2.4 billion, including CAD 619.9 million of cash and cash equivalents. The proceeds from its equity offering increased the available liquidity compared to the prior quarter. We believe that cash and cash equivalents, the availability under the committed revolving credit facility and cash generated from its operations would be sufficient to provide liquidity for their operations over the foreseeable future. 

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the company posted revenue of CAD 832.4 million, as compared to CAD 923.5 million in the previous corresponding period (pcp). The decline was due to a lower income generated from Civil Aviation Training Solutions and Defence and Security by CAD 145.9 million and CAD 33.1 million, respectively, partially offset by an increase of CAD 87.9 million from Healthcare.
• The group’s operating profit slides to CAD 82.9 million, from CAD 154.9 million in Q3FY19. The decrease was mainly due to a lower gross profit combined with restructuring costs amounting to CAD 14.3 million.
• The company reported a net income of CAD 49.7 million, compared to a net income of CAD 99.8 million in the previous corresponding period (pcp), slightly supported by an income tax recovery.

Risks associated with investment

The bulk of the group's sales comes from the aviation sector and owing to continued lower activities due to travel constraints, most training projects have been suspended, affecting the company's order flow. If the current trend continues, the company's cash flows, and revenue would suffer.

Valuation Methodology (Illustrative): EV to Sales 

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

In comparison to the first half of FY21, the Company predicts a better second half and a healthy free cash flow for the whole fiscal year, which is promising given the current economic situation. The company is also purchasing L3Harris' Military Training service, which would help in expanding its Defense and Security growth plan and extend its presence in the US. Furthermore, it sees opportunities in the healthcare business, including its new digital and virtual learning products. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 36.89 as of April 20, 2021. We have considered Air Lease Corp, Franklin Covey Co. as the peer group for the comparison.

1-Year Price Chart (as on April 20, 2021). 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.