Canadian Natural Resources Limited

Canadian Natural Resources Limited (TSX: CNQ) is a leading oil and natural gas production company, which has operations across Western Canada, the U.K. portion of the North Sea and Offshore Africa.

Key Updates:

• Focused on improved operations: For FY21, the company expects total production within the range of 1,190 to 1,260 MBOE/day, higher than 1,164 MBOE/day in FY20. Natural gas production is expected within the range of 1,620 to 1,680 MMcf/d, as compared to 1,477 MMcf/d in FY20. Moreover, the group also budgeted its capital expenditure at CAD 3,205 million, which includes maintenance capital of CAD 3,000 million and roughly CAD 200 million in growth capital.

• Higher dividend distribution amidst economic jolt: The company reported a higher dividend distribution of CAD 503 million in Q1FY21, as compared to CAD 444 million in Q1FY20. The improvement in the dividend distribution is backed up by strong cash flow generation. Notably, the company reported its cash flow from operation at CAD 2,536 million in Q1FY21, as compared to CAD 1,725 million in Q1FY20. Moreover, the stock carries a dividend yield of ~4.1%, which is decent considering the current interest rate scenario. The group has paid a constant dividend in the last two decades across business cycles and reported ~20% CAGR in dividend distribution since its inception.

Source: Company Report

• Ample Liquidity and cost control initiatives: The group has an impressive liquidity level of CAD 5,547 million, which includes cash and cash equivalents and short-term investments of CAD 4,959 million. The current liquidity level seems to be sufficient to fund the company’s working capital requirements. Moreover, the group is focusing on operational improvements by increasing efficiencies with production optimization at diverse asset base along with cost control strategies.

Q1FY21 Financial Highlights:

• CNQ announced its quarterly result, wherein the company posted revenue of CAD 6,608 million, significantly higher than CAD 4,500 million in the previous corresponding period (pcp). The growth was supported by improved income from both Crude oil and NGLs and Natural gas segments.
• The quarter witnessed higher production costs, increase in transportation, blending & feedstock expense. On the flip side, a lower interest and other financing expense and a foreign exchange gain supported the profitability.
• The company reported net earnings of CAD 1,377 million, as compared to a net loss of CAD 1,282 million in Q1FY20.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Decline in crude oil and natural prices are likely to dampen the company’s income and profitability. Moreover, failure to implement its cost control strategies in a proper manner might weigh high on the company’s margins.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

At the end of FY21, the company is targeting to lower its Debt to EBITDA to ~1.1x from 3.6x in FY20. This is expected to be achieved by prudent free cash flow management, improving metrics through the cycle and periodical debt repayment. The group repaid more than CAD 1.6 billion of non-revolving term loans so far this year, which is encouraging. Moreover, the stock is offering a decent dividend yield amid a low interest rate environment. We have valued the stock using the Price to Earnings-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered the industry (Oil & gas) median on an NTM basis. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 45.25 on June 11, 2021.

One-Year Technical Price Chart (as on June 11, 2021). Analysis by Kalkine Group

Bausch Health Companies Inc.

Bausch Health Companies Inc. (TSX: BHC) is a global specialty pharmaceutical, consumer health, and medical device company. The group operates through its branded products for the dermatology, gastrointestinal, and ophthalmology markets. 

Key Highlights:

• Robust Growth in Cash flows: The group reported a surge in the cash from operations, which stood at USD 443 million, significantly higher than USD 261 million in Q1FY20. An increase in cash from operations is a positive sign for the company.
  

• Balanced Portfolio: The group has a balanced portfolio, and its performance is not dependent on a particular segment. In Q1FY21, the group derived 38% and 25% of its income from Global Consumer and Global Vision Care segments, while the Global Ophtho Rx and Global Surgical derived 19% and 18% of the total revenue. Less dependence on a particular segment indicates a balanced risk profile and income stability.
  

• Impressive Product pipeline: The company has a strong product portfolio, while its pipeline remains impressive as it expects Phase 3 clinical studies of its LUMIFY® Line Extensions in FY21. The group also expects clinical study results from New Ophthalmic Viscosurgical Device in Q4FY21. Moreover, within the Salix segment, the group completed the thorough QT study of Amiselimod S1P5 Modulator and is expected its Phase 2 study to commence in H1FY21. Additionally, the group would launch its Clear + Brilliant® Touch laser under the Ortho segment in H1FY21.

• Agreement with Lochan LLC : On June 08, 2021, the group collaborated with Lochan LLC, wherein it would develop the next generation of Bausch + Lomb's eyeTELLIGENCE ^™ clinical decision support software, which would provide surgeons to flawlessly integrate all aspects of the cataract, retinal and refractive surgery processes.

Q1FY21 Financial Highlights:

• BHC announced its quarterly results, wherein the company posted revenue of USD 2,003 million, higher than USD 1,986 million in the previous corresponding period (pcp). The improvement was primarily driven by improvement from Global Vision Care Revenue driven by the ramp of astigmatism line extensions coupled with new launches within the segment.
• The company reported a total expense of USD 2,248 million, up from USD 1,764 million in pcp. The increase in expenses was primarily due to the higher cost of goods sold and inclusion of Goodwill impairments, partially offset by lower Selling, general and administrative costs coupled with a slide in Research and development expense.
• The company reported an operating loss of USD 221 million, compared to an operating income of USD 248 million in Q1FY20.
• The company posted a net loss of USD 607 million, as compared to a net loss of USD 152 million in Q1FY20.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Due to the ongoing restriction caused on account of pandemic, the group might witness a setback in its overall demand and face a hindrance in the supply chain and logistics. 

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The management highlighted that business witnessed a revival in the demand while its organic revenue reached near pre-COVID-19 levels, which is impressive. The company has taken a three-year target (from FY19-22) wherein it expects its revenue to grow at a CAGR of 3% to 5%, while its adjusted EBITDA is expected to grow at a CAGR of 4% to 7%. We have valued the stock using Price to Earnings based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Viatris Inc, Bristol-Myers Squibb Co and Jazz Pharmaceuticals PLC etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 38.74 on June 11, 2021.

One-Year Technical Price Chart (as on June 11, 2021). Analysis by Kalkine Group

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

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