Canadian Tire Corporation

Canadian Tire Corporation (TSX: CTC.A) sells home goods, sporting equipment, apparel, footwear, automotive parts and accessories, and vehicle fuel through more than 1,750-store network of the company, dealer, and franchise-operated locations across Canada. Apart from the namesake banner, stores operate primarily under the Mark's, SportChek, Party City, Atmosphere, and PartSource monikers. 

Key Updates:

• Improved margins: The company reported improved margins than the industry median, which indicates better operational efficiencies and is a key positive. EBITDA margin and operating margin stood at 15.4% and 10.9%, respectively, in Q3FY21, higher than the industry median of 12.5% and 10%, respectively. Moreover, the company reported its net margin at 7.1% in Q3FY21, higher than the industry median of 6.2%.
• Decent Dividend Yield: The company has paid a consistent dividend to its shareholders despite economic cycles, backed by stable cash flows. Notably, in 9MFY21, the company distributed a total dividend of CAD 203.4 million, higher than CAD 197.4 million in pcp. Moreover, the stock of CTC.A carries a dividend yield of ~2.952% on an annualized basis, which looks decent considering the ongoing interest rate scenario.

       Five-year dividend distribution (Source: REFINITIV)

• Growth from leading brands: In 9MFY21, the company witnessed a 13.4% y-o-y growth in its revenue of CAD 10,253.1 million, supported by 24.7% and 18.2% y-o-y growth from its Sportcheck and Mark’s, respectively, while its Canadian Tire brand reported a growth of 4.7% on y-o-y basis. The above was driven by growth from its omni-channel across all banners, coupled with strong eCommerce penetration.

Q3FY21 Financial Highlights:

• A announced its third quarter result, wherein the group posted its revenue of CAD 3,913.1 million, as compared to CAD 3,986.4 million in pcp. The decrease in revenue was mainly due to a decline in the retail performance due to lower shipments to Dealers during the period.
• Gross profit was recorded at CAD 1,357.1 million, climbed from CAD 1,346.8 million in pcp, primarily supported a significantly lower cost of producing revenue (CAD 2,556 million v/s CAD 2,639 million in pcp).
• Income before income taxes came at CAD 369.9 million, slide from CAD 442.3 million in the previous corresponding period (pcp). The quarter witnessed higher selling, general and administrative expenses, while lower net finance costs supported the profitability.
• The company reported its net income of CAD 279.5 million, as compared to CAD 326.3 million in pcp.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: The company reported a higher D/E ratio of 1.46x in Q3FY21, as compared to the industry median of 0.73x. A higher D/E ratio indicates lower financial flexibility and remains a major concern.

  Valuation Methodology (Illustrative): Price to Earnings based.

Stock Recommendation:

The company reported prudent working capital management and posted quick ratio and a current ratio of 1.31x and 1.74x, respectively, in Q3FY21, as compared to the industry median of 0.49x and 1.46x, respectively. The above indicates that the company is well managing its short-term liabilities with its current assets. 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 peers like Roots Corp, Parkland Fuel Corp and Gildan Activewear Inc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of CTC.A at the last trading price of CAD 176.17 on November 17, 2021.

One-Year Technical Price Chart (as on November 17, 2021). Analysis by Kalkine Group 

Canadian Utilities Ltd

Canadian Utilities Ltd (TSX: CU) is a Canada-based company which offers services in the areas of electricity, pipelines & liquids and retail energy. The Company’s segments include Electricity, Pipelines & Liquids and Corporate & Other.

Key Highlights

• An Income play: The Company has an excellent track record of dividend distribution and has increased its distribution over the years, reflecting resilience and healthy cash flow generation. Recently, the Company declared a dividend of CAD 0.4398 per share and at the last closing price of CAD 35.27, the stock is offering a dividend yield of 4.982%, which translates into an essential factor for regular income-seeking investors with a long-term horizon.

Source: Company

• Strong Financial performance: The company reported decent performance in Q3 2021, with revenue surged by 9% to CAD 790 million, against CAD 727 million in the previous corresponding period, while adjusted earnings improved by 14% to CAD 88 million against CAD 76 million in the previous corresponding period.

• Industry Beating Margins: The Company's resilient business helped them leaping the industry median margins on many fronts in Q3 2021, which is a key positive. The chart below gives a glimpse of this.

• Robust liquidity: The on-going steady performance of the company’s operations and constant upgrading in the strength of their balance sheet resulted, with total liquidity of CAD 3,023 million, including a cash balance of CAD 579 million, while as on September 30, 2021, the group had available credit limit of CAD 2,252 million.

Source: Company

Financial overview of Q3 2021

Source: Company

• In Q3 2021, the company posted revenue of CAD 790 million, against CAD 727 million in the previous corresponding period. The rise in revenue was primarily due to improved performance at ATCOenergy resulting from higher electricity and natural gas commodity prices and customer growth.
• Operating profit stood at lower side to CAD 189 million in the reported quarter against CAD 216 million in pcp, primarily due to higher salaries, coupled with higher depreciation and other expenses.
• Earning for the period stood at CAD 73 million against CAD 93 million in Q3 2020, the decline in net income was primarily due to above stated reasons.

Risks associated with investment

The company is exposed to many risk factors that, alone or cumulatively can affect its operations and financial health. Some of the risks are the supply of and demand for energy, Realization prices, exchange rates, inflation, and interest rates. A prolonged economic downturn could adversely impact customers, contractors, and suppliers' ability to fulfil their obligations and could disrupt operations and financial health.

Valuation Methodology Illustrative: Price to Cash Flow

Stock recommendation

The Company reported decent Q3 2021 results, which despite the challenges presented by the COVID-19 pandemic, reflect year-over-year growth in its key financial metrics. The utility segment is likely to remain stable in the coming quarters, as the sector is categorized under "essentials" and the business expects to benefit from the improving realization prices. The company has a concrete financial strength, with a cash of approximately CAD 589 million as on September 30,2021, along an unused credit facility of CAD 2,252 million. Furthermore, the industry-beating margins of the company reflect the resilience of the business. Also, a consistent dividend-paying company, with a dividend yield of 4.982%, is an essential factor for regular income-seeking investors with a long-term horizon. Therefore, based on the above rationale and valuation done using the above methodology, we recommend a "Hold" rating at the closing price of CAD 35.31 as on November 17, 2021. We have considered TC Energy Corp, Capital Power Corp, etc. as a peer group for the comparison.

One-Year Technical Price Chart (as on November 17, 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.