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

• Event update: The company will be announcing its 2020 Fourth Quarter Results on 2nd March 2021. 
• Tremendous Increase in free cash flows: In Q3 2020, the Company garnered CAD 191 million in cash from operating activities, increased by 142% against Q3 2019, primarily due to favourable changes in Weston Foods’ noncash working capital recorded in other and increased distributions from Choice Properties, respectively. The group also witnessed an inflow of CAD 307 million in Free cash flow, increased by 803% compared against Q3 2019. 

Source: Company 

• A lively 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 sales mix. Furthermore, we believe this sales mix and retail participation would improve more.

• 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 foreseeable, which augurs the liquidity level. 

Financial overview of Q3 2020

Source: Company 

• In Q3 2020, the Company reported revenue of CAD 16.2 billion, increased by 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 improved to 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.

Therefore, based on the above rationale and valuation done, we have given a “Buy” rating at the closing price of CAD 94.2 on February 3, 2020. We have considered Metro Inc, Saputo Inc, Empire Company Ltd, Alimentation Couche-Tard Inc etc. as the comparison's peer group.

Source: Refinitiv (Thomson Reuters)

Fairfax Financial Holdings Limited

Fairfax Financial Holdings Limited (TSX: FFH) is engaged in property and casualty insurance and reinsurance and the associated investment management.

Key Highlights:

• Stock Hovering Above the Crucial Support Levels: The stock of FFH closed above the long -term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish pattern. Moreover, the stock appreciated ~13% and ~32% in the last six months and nine months, respectively.
• Ample Liquidity: The corporation reported stable liquidity, while the Management seems confident in meeting its near-term obligations, which is encouraging. At the end of Q3FY20, the company reported a credit facility of USD 700 million, along with an issuance of USD 650 million of senior notes, issued on April 29, 2020. We believe the company is well-capitalized and would meet its near-term working capital requirements.
• Better than industry ratio: The group reported improved operational efficiency and posted a combined ratio for Q3FY20 at 85.9%, significantly lower than the industry median of 97.2%, seems impressive. Notably, in Q3FY20, the group’s loss ratio and an expense ratio stood at 68.3% and 17.6%, respectively, as compared to the industry median of 68.8% and 30.5%, respectively.
• Result Update: The company would disclose its FY20 financial result on February 11, 2021.

Q3FY20 Financial Highlights:

• FFH announced its quarterly results, wherein the group posted net premium written at USD 3,735.2 million, higher than USD 3,318.3 million in the previous corresponding period (pcp). The company’s revenue stood at USD 4,992.6 million, slightly higher than USD 4,925.9 million in Q3FY19, supported by a higher net premium earned, while a lower interest and dividends coupled with a decline in the other revenue remained a drag.
• The company reported total expense at USD 4,913.1 million, as compared to USD 4,856.0 million in Q3FY19. The increase in the expense was primarily attributable to a higher loss on claims (USD 2,366.3 million versus USD 2,111.6 million in pcp).
• The company reported lower net earnings of USD 41.8 million, as compared to USD 74.4 million in Q3FY19. The decline was primarily due to a higher provision of income taxes of USD 37.7 million as compared to a recovery of income taxes of USD 4.5 million in Q3FY19.
• The company posted cash and investments of USD 1,153 million, higher than USD 975.5 million in FY19. FFH’s total assets were recorded at USD 71.340 billion at the end of Q3FY20.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Increase in claims, and volatility in the financial markets might take a toll on the overall performance of the group.

Valuation Methodology (Illustrative): Price to Book Value

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

Stock Recommendation:

The group reported a revenue growth despite the challenging times in the overall economy, which is commendable. We expect, with the gradual revival of the overall economy, the company would report lower net claims, which would further boost the profitability. We have valued the stock using the Price to BV based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Hartford Financial Services Group Inc, American International Group Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 457.04 on February 03, 2021.

1-Year Price Chary (as on February 03, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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