George Weston Ltd

George Weston Ltd (TSX: WN) is a holding company that operates through three subsidiaries encompassing retail, real estate, and consumer goods. The first is Loblaw, the largest grocer in Canada, in which it has a 52% controlling stake. The second is Choice Properties, an open-ended real estate investment trust, where George Weston's ownership sits close to 63%. The third is Weston Foods, a North American bakery, which the firm wholly owns.

Key highlights 

• Tremendous Increase in free cash flows: In Q3 2020, the Company garnered CAD 191 million in cash from operating activities, up by 142% compared to Q3 2019, primarily due to favourable changes in Weston Foods’ noncash working capital recorded in Other and increased distributions from Choice Properties. The group also witnessed an inflow of CAD 307 million in Free cash flow, up by 803% compared to Q3 2019. 

Source: Company 

• Robust performance from the retail segment: The company derives significant revenue from the retail part, and it increased by CAD 1,044 million, or 7.2%, compared to the same period in 2019. The increase was primarily due to positive same-store sales growth and a net increase in retail square footage. Food retail same-store sales growth was 6.9% for the quarter. The company also witnessed a rise in average article price due to a change in sales mix.

• Ample amount of Liquidity:The company reported the available liquidity of CAD 3.8 billion for the Loblaw company, while Choice Properties reported CAD 1.5 billion of available liquidity under its committed credit facility, which seems sufficient to mitigate the current challenging operating environment. Furthermore, the company does not have any significant debt-maturities for the remainder of the year, which augurs the liquidity level. 

Financial overview of Q3 2020

Source: Company 

• In Q3 2020, the Company reported CAD 16.2 billion revenue, increased by CAD 983 million or 6.5% compared to CAD 15.2 billion in the previous corresponding period. The increase was mainly due to growth in Loblaw retail, partially offset by the decline in Weston Foods' sales driven by the impact of COVID-19.

Source: Company

• The Company's operating income stood at CAD 983 million, up by CAD 99 million or 11% compared to CAD 884 million in pcp. The increase in operating income was primarily due to the favourable year-over-year net impact of adjusting items and improvements in Loblaw's underlying operating performance and certain one-time gains.

• Operating margin was 6.1%, up from the 5.8% reported in Q3 2019. The increase in operating margin was mainly driven by higher revenue.

• The Company's net income in Q3 2020 stood at CAD 498 million, up 89% compared to CAD 264 million in pcp. 

Risks associated with investment

The performance of the Company's business is prone to several risks which could affect income and liquidity. Lower consumer spending, coupled with a decline in the traffic, might act as a drag for the Company, which would dampen the Company's overall performance.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

The company received significant support from Loblaw, which delivered strong results in a quarter still significantly affected by COVID-19, with same-store sales increases, strong online growth and an improving margin trend. Weston Foods sales and earnings also improved in Q3 2020 compared to the Q2 2020. Food retailers began to reopen bakery display cases, and government-mandated restrictions for dine-in restaurants eased in several regions. We believe this positive momentum to continue, as the customers began to visit restaurants and food stores more frequently. We have valued the stock using P/E based relative valuation method and have arrived at a double-digit upside (percentage term). We have considered Saputo Inc, Empire Company Ltd, Alimentation Couche-Tard Inc etc., as the peer group for comparison purpose. Hence, we have given a ‘Buy’ recommendation on the stock at the closing price of CAD 95.08 on December 31, 2020.

Source: Refinitiv (Thomson Reuters)

Fairfax Financial Holdings Limited

Fairfax Financial Holdings Limited (TSX: FFH) is a holding company that operates in property and casualty insurance and reinsurance and the associated investment management.

Key Updates:

• Manageable D/E ratio: Despite the ongoing slowdown, FFH has a manageable debt component as its D/E ratio stood at 0.53 (Total Debt of USD 8,649.6 million and Equity of USD 16,386.40 million), which is commendable. A lower debt component augurs well for lower finance costs and subsequently supporting the bottom-line as well.
• Stable Liquidity Levels: The company has ample liquidity, and Management is confident in meeting its near-term obligations, which is a key positive. At the end of 9MFY20, the company bolstered its liquidity position by drawing USD 700 million from credit facility and a net proceeds from the issuance of USD 650 million of senior notes that were issued on April 29, 2020. We believe the company is well-capitalized and would meet its near-term requirements.

Q3FY20 Financial Highlights:

• FFH announced its third-quarter results, wherein the company reported net premium written at USD 3,735.2 million, improved from USD 3,318.3 million in the previous corresponding period (pcp). The group posted a stable top-line of USD 4,992.6 million, stood at par with USD 4,925.9 million in pcp. Stability in the top-line was supported by a higher net premium earned, while a lower interest and dividends coupled with a decline in the other revenue remained a drag.
• FFH reported its total expense at USD 4,913.1 million, increased slightly from USD 4,856.0 million in Q3FY19, primarily attributable to a higher loss on claims.
• The company reported net earnings of USD 41.8 million, lower than USD 74.4 million in Q3FY19. The decrease was primarily due to a higher provision of income taxes of USD 37.7 million versus recovery of income taxes of USD 4.5 million in Q3FY19.
• The company posted its cash and investments of USD 1,153 million, higher than USD 975.5 million in FY19. The group’s total assets stood at USD 71,340 million at the end of Q3FY20.                   

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Volatility in the financial markets, change in interest rates, lower dividend income may affect the group’s overall performance.

Valuation Methodology: Price to Book Based (Illustrative)

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

Stock Recommendation:

The group is emphasizing on the asset-light model and sold its entire interest in RiverStone Europe, which operates as a run-off insurance services at a price consideration of USD 235.7 million. The company has a retained its top-line despite a slowdown in the overall economy, which is encouraging. We believe, with the gradual revival of the overall economy, the company would likely to deliver improved performance in the coming days. The stock closed above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish trend. We have valued the stock using Price to Book-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered Power Corporation of Canada, Manulife Financial Corp and QBE Insurance Group Ltd etc., as a peer group. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 433.85 on December 31, 2020.

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

Disclaimer

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