Intact Financial Corporation

Intact Financial Corporation (TSX: IFC) is a property and casualty insurance company which provides written premiums in Canada. The company distributes insurance under the Intact Insurance brand through a network of brokers and a wholly-owned subsidiary, BrokerLink, and directly to consumers through Belairdirect. The majority of the company's direct premiums are written in the personal automotive space.

Key Highlights:

• Surge in dividend payment: The company reported a higher dividend distribution of CAD 320 million in H1FY21, as compared to CAD 237 million in pcp, supported by higher cash flow generation. This looks impressive as most of the companies are lowering their dividend distribution in order to retain liquidity.
• Room for expansion across the UK and Ireland region remains high: Apart from Canada, the company also operates across UK & Ireland by leveraging company’s strong brands and scale positions. Currently, the company constitutes only 5% market share of the entire CAD 80 billion property & casualty insurance (P&C) Industry in the UK, leaving ample room for expansion.
• Conservative Asset management strategy: The company has its in-house investment management department, which focuses on capital preservation and allocates ~82% of its funds into fixed-income securities with the highest credit ratings.

Q2FY21 Financial Highlights:

• In the second quarter of FY21, the company reported its total revenue at CAD 3.819 billion, which jumped from CAD 2.971 billion in the previous corresponding period (pcp). The improvement was driven by higher net earned premiums (CAD 3.508 billion v/s CAD 2.712 million in Q2FY20).
• Income before income taxes came in at CAD 676 million, up from CAD 317 million in Q2FY20, supported by elevated revenue, partially offset by a higher net claim (CAD 1,857 million v/s CAD 1,733 million in pcp), and a higher underwriting expense.
• Net income was recorded at CAD 573 million, climbed from CAD 263 million in Q2FY20.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: Increase in the total claims incurred and underwriting expenses would dampen the company’s performance and would take a toll on the overall margins of the group.

Valuation Methodology (Illustrative): Price to Book Value

Stock Recommendation:

The company reported a constant growth in its Operating ROE, which stood at 19.8% in H1FY21, the highest level in the last ten years. Within the P&C insurance  industry in Canada, the group expects the industry premium growth to remain in higher single-digit level in the coming quarters. We have valued the stock using the Price to book based relative valuation method and have arrived at a target upside of single digit (in percentage terms). For the said purposes, we have considered peers like Sun Life Financial Inc, National Bank of Canada etc. Hence, considering the above facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 166.10 on October 07, 2021.

One-Year Technical Price Chart (as on October 07, 2021). Source: REFINITIV, Analysis by Kalkine Group

Hydro One Limited

Hydro One Limited (TSX: H) operates in regulated transmission and distribution assets in Ontario. The group is the largest electricity provider that serves nearly 1.4 million customers. The company derives roughly 60% of its revenue from the transmission segment, while the rest is being derived from distribution.

Key Highlights:

• Increase in dividend payment amidst sluggish macros: The company distributed a higher dividend backed by improved cash from operations, which is a key positive. Notably, in H1FY21, the company posted its dividend distribution of CAD 311 million, higher than CAD 305 million in pcp. Moreover, the stock carries a dividend yield of ~3.5%, which looks decent considering the current interest rate scenario.

Source: Company Presentation

• Growth in cash flows: The company reported higher cash from operations both in Q2FY21 and H1FY21, respectively, which suggests favorable operating performance which would subsequently lead to improved liquidity. Net cash from operating activities stood at CAD 412 million and CAD 929 million in Q2FY21 and H1FY21, respectively, as compared to CAD 375 million and CAD 923 million in Q2FY20 and H1FY20, respectively.

Q2FY21 Financial Highlights:

• H announced its quarterly result, wherein the company posted revenues of CAD 1,722 million, higher than CAD 1,670 million in Q2FY20. The increase was driven by higher income from the distribution segment (CAD 1,263 million v/s CAD 1,201 million in pcp), partially offset by a slide in income from the transmission segment (CAD 448 million v/s CAD 459 million in pcp).
• Total costs stood at CAD 1,352 million, as compared to CAD 1,291 million in pcp. The surge was primarily due to a rise in purchased power costs (CAD 838 million v/s CAD 808 million in the previous year), coupled with a surge in operation, maintenance and administration costs (CAD 289 million v/s CAD 270 million in pcp).
• Income before financing charges and income tax expense was recorded at CAD 370 million, as compared to CAD 379 million in Q2FY20.
• Net income was recorded at CAD 240 million, down from CAD 1,109 million in Q2FY20.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks:  The company’s operations are regulated in nature, and hence the realization per unit depends on current regulatory rates as capped by the regulatory bodies. Moreover, unfavorable weather conditions might hinder the demand dynamics.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company commands higher profitability margins, as compared to the industry, which indicates better operational efficiencies. Notably, in Q2FY21, the company reported its operating margin and net profit margin at 21.5% and 13.9%, respectively, which was higher than the industry median of 19.8% and 11.7%, respectively. We have valued the stock using the Price to Cash Flow based valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Canadian Utilities Ltd, Fortis Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 30.13 on October 7, 2021.

One-Year Technical Price Chart (as on October 07, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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.