Constellation Software Inc

Constellation Software Inc (TSX: CSU) is engaged in the development, installation and customization of software as well as in the provisioning of related professional services and support for customers globally.

Key Highlights

• Industry Leading Gross Margin of 98.1% in Q1FY21whereas industry average stock Gross Margin stood 76.7%. Also, margin improved on YoY basis.
• The company has solid free cash flow available for shareholders to pay dividend and fund future expansion as well. At the end of Q1FY21, free cash flow stood at USD 269 million.
• Further, its shares generating significantly higher return for its shareholders, with FY20 ROE at 50.3%, whereas industry median is negative 2.4%. Moreover, the group consistently generated ROE above 40% since 2015, implies a sound fundamental.
• Manageable debt, with Net Debt/EBITDA at the end of Q1FY21 stood at 0.20x, whereas industry median stood at 2.2x, respectively.
• The group has sufficient cash and available credit capacity to continue to operate for the foreseeable future.

Financial Highlights: Q1FY21

Source: Company Filing

• Total revenue for the quarter ended March 31, 2021 was USD 1,176 million, an increase of 23%, or USD 223 million, compared to USD 953 million for the comparable period in 2020. The increase was primarily attributable to growth from acquisitions as the Company experienced organic growth of 6% in the quarter, 1% after adjusting for the impact of changes in the valuation of the US dollar against most major currencies in which the Company transacts business.
• The Net loss attributable to common shareholders of CSU for the quarter ended March 31, 2021 was USD 9 million compared to net income of USD 83 million for the same period in 2020.
• Net cash position increased by USD 5 million to USD 530 million in the three months ended March 31, 2021 resulting from cash flows from operations exceeding the net capital deployed on acquisitions plus dividends.
• Cash increased by USD 174 million to USD 932 million at March 31, 2021 compared to USD 758 million at December 31, 2020 and bank indebtedness increased by USD 169 million to USD 402 million at March 31, 2021 compared to USD 233 million at December 31, 2020.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation: The company reported decent topline performance in the first quarter of FY21, together with the group has significant free cash flow for shareholder, which provide a margin of safety to the existing as well as potential investors as well. Therefore, based on the above rationale and valuation, we suggest a “Hold” recommendation on the stock at the closing price of CAD 1,721.43 on May 11, 2021.

Technical Price Chart (as on May 11, 2021). Source: Refinitiv (Thomson Reuters)

GFL Environmental Inc

GFL Environmental Inc. (TSX: GFL) is a leading diversified environmental services company, primarily operates in North America. The group provides a comprehensive line of non-hazardous solid waste management, infrastructure & soil remediation, and liquid waste management.

Key Highlights:

• Strong Traction from Solid waste segment: The majority of the revenue (~83%) is being derived from the solid waste management, which originates from the major metropolitan centers or primary markets is predominately derived from municipal residential contracts. During the quarter, the company reported a 260bps improvement in the Adjusted EBITDA margin (31.0% v/s 28.4% in pcp), supported by improved pricing and cost efficiencies. 

• Strong growth in cash flows: During the first quarter of FY21, the company reported a robust cash flow generation, wherein adjusted free cash flow grew by CAD 85.2 million to CAD 102.1 million, depicting a whooping growth of 504.1% y-o-y. The increase was driven by higher cash flow from operating activities, partially offset by higher net capital expenditure.                   

Source: Company Presentaion

Q1FY21 Financial Highlights:

• GFL announced its quarterly result, wherein the company posted revenue of CAD 1,186.6 million, higher than CAD 931.3 million in the previous corresponding period (pcp). The increase was driven by strong momentum from the Solid waste segment (CAD 1,117.4 million v/s CAD 796.4 million in Q1FY20).
• The quarter was marked by an increase in Cost of sales (CAD 1,086.7 million v/s CAD 852.3 million in pcp), partially offset by a fall in selling, general and administrative expenses (CAD 133.2 million v/s CAD 155.1 million in Q1FY20).
• Loss before income taxes lowered to CAD 315.5 million, as compared to a loss of CAD 365.7 million in Q1FY20.
• Net loss compressed to CAD 226.2 million from a net loss of CAD 278.0 million a year ago.
• The group reported a cash balance of CAD 11.1 million, while total assets were recorded at CAD 15,509.1 million.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks:  Total debt increase to CAD 6,402 million from CAD 4,692 million in the previous corresponding period. Higher debt may impact the company’s financial flexibility. Moreover, a change in the revenue mix might hinder the company’s overall margins.

Valuation Methodology (Illustrative): EV to Sales based

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

Stock Recommendation:

The company’s business is resilient in nature and has a diversified customer across different geographies, which gives a lower risk profile. At the end of Q1FY21, the company reported net leverage at 4.58x, improved from 4.62x in FY20. A decline in net leverage depicts higher financial flexibility and is a key positive. Moreover, the company reported an improved Adjusted EBITDA margin of 25.8% in Q1FY21, compared to 23.9% in Q4FY20, which is good. We have valued the stock using the EV to Sales-based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Waste Connections Inc, Republic Services Inc etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 37.64 on May 11, 2021.

One-Year Price Chart (as on May 11, 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.