Suncor Energy Inc.

Strong Balance Sheet to Withstand Current Economic Crisis:  Suncor Energy Inc. (TSX: SU) is Canada's leading integrated energy company. The company’s operations include oil sands development and upgrading, offshore oil and gas production, petroleum refining, and product marketing under the Petro-Canada brand.

SU paid a quarterly dividend of $0.465 per share, reflecting an increase of 11% on y-o-y basis. During FY19, the company distributed CAD 2,614 million as dividends, as compared to CAD 2,333 million in FY18.The Board also approved an increase to the company’s existing share repurchase program from CAD 2.0 billion to CAD 2.5 billion.

Financial Highlights: For the fourth quarter of FY19, SU reported a mixed set of numbers, wherein funds from operations stood at CAD 2.6 billion, bringing annual FFO to record CAD 10.8 billion. Cash flow provided by operating activities stood at CAD 2.3 billion, as compared to CAD 3.0 billion in Q4FY18. The company reported operating earnings of CAD 782 million, up from CAD 580 million in Q4FY18. 

Q4FY19 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: P/CF Based Relative Valuation

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

Stock Recommendation: The stock of SU is quoting at CAD 23.03 with a market capitalization of ~CAD 35.162 billion. The stock made a correction of 31.29% and 48.06% in the last one month and three months, respectively. The sharp decline in oil prices and uncertainty surrounding the economic impact from COVID-19 outbreak has taken a toll on oil & gas companies. Oil companies are battling both supply and demand shock. However, with the sharp correction in stock prices, it is prudent to accumulate the shares of some of the fundamentally strong oil companies that include Suncor for the long-term. The company, similar to most of its peers, is cutting back on spending, reducing costs, and focusing on value over volume to withstand the current economic crisis. The company cut back on capital spending, which is a prudent step. Further, the company plans to reduce costs by more than CAD 1 billion when compared to the prior year. We expect Suncor to weather the current economic crisis and bounce back strongly as oil prices recover. The company has a strong liquidity position of CAD 3.75 billion. We have valued the stock using the P/CF based relative valuation method. We have taken peers like Imperial Oil Ltd. (TSX: IMO), Canadian Natural Resources Ltd. (TSX: CNQ), Cenovus Energy Inc (TSX: CVE) etc. and arrived at a target price of lower-double digit upside (in% terms). Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 23.03 as on April 07, 2020.

SU One-Year Daily Price Chart (Source: Thomson Reuters)

Restaurant Brands International Inc.

Restaurant Brands International (TSX: QSR) is the world’s largest quick-service restaurant company. The company has over 27,000 restaurants in more than 100 countries with US$ 34 billion in system-wide sales. The company operates through three iconic brands, including Tim Hortons (TH), Burger King (BK) and Popeyes Louisiana Kitchen (PLK).

Shares of Restaurant Brands International have corrected more than 33.5% so far this year, courtesy coronavirus outbreak. Investors worry that the company’s growth measures could take a back seat in 2020 as it strives to maintain liquidity. Businesses around the world, including restaurants, are taking a significant amount of hit on their financials as people stay indoors and practise social distancing to curb the spread of the virus.

While traffic will undoubtedly take a hit, quick-service restaurants like Restaurant Brands International have managed to operate stores and kept the cash registers ringing. Restaurant Brands International continues to serve its guests through online orders, home delivery, and drive-thru while maintaining the safety and social distancing norms. While challenges persist in the near-term, the sharp decline in QSR stock provides an excellent entry point to go long.

Financial highlights: Restaurant Brands International ended 2019 on a healthy note. The company’s system-wide sales increased by 8.3% year-over-year. Moreover, net restaurants increased by 5.2%. Comparable sales for Burger King rose 3.4%, including a 1.7% increase in the U.S. comparable sales. Meanwhile, comparable sales jumped 12.1% for Popeyes, reflecting stellar growth in the U.S. At Tim Hortons, comparable sales fell 1.5%. Adjusted EBITDA rose 6.5% year-over-year to US$ 2,304 million. Adjusted net income came in at US$ 1,274 million, up from US$ 2,212 million in the prior year. Adjusted earnings per share increased by about 3% to US$ 2.72.

Cash flow from operating activities stood at US$ 1,476 million in 2019, as compared to US$ 1,165 in 2018. Meanwhile, free cash flow increased to US$ 1,414 million compared to US$ 1,079 million in 2018. The company announced a dividend of US$ 0.52 per share for the first quarter of 2020. 

Financial Highlights (Source: Company Reports) 

Valuation Methodology: EV/EBITDA Multiple Approach 

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months 

Stock recommendation: Restaurant Brands International has enough liquidity to survive the current crisis. At the end of 2019, the company had cash and cash equivalents of US$ 1.5 billion, with total liquidity of about US$ 2.5 billion, including the US$ 1.0 billion from its revolving credit facility. Barring near-term challenges, we expect QSR stock to bounce back strongly once the economy stabilizes and returns to growth. Moreover, the sharp decline in QSR stock reflects the negatives and provides an excellent entry point for long-term investors. Further, the company’s dividend yield of 5.03% looks lucrative. QSR stock trades at a significant discount when compared to its peers. QSR stock trades at forward EV/EBITDA multiple of 13.8x, which is lower than the peer group average of 16.4x. We expect the multiple to expand in coming quarters. We have valued QSR stock using EV/EBITDA relative valuation method. We have arrived at a target price with an upside in lower double-digit (in percentage terms). We give a “Buy” recommendation on QSR stock at the closing market price of CAD 54.99 per share, up ~2.96% on April 7, 2020.

QSR One-Year Daily Price Chart (Source: 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.