Canadian Tire Corporation Limited

Canadian Tire Corporation Limited (TSX: CTC.A) is a Canada-based company, which operates through a range of businesses. The company's operating segments include the Retail segment, the CT REIT segment, and the Financial Services segment. The retail segment is engaged in selling home goods, sporting equipment, apparel, footwear, automotive parts and accessories, and fuel through a roughly 1,750-store network of company, dealer, and franchise-operated locations across Canada. CT REIT is engaged in owning, developing, and leasing of commercial properties. Financial services include business carried out by Canadian Tire Bank and CTFS Bermuda Ltd.

Investment rationales

• Strengthening eCommerce Infrastructure: With the stores closed and consumers sheltering at home, eCommerce channels are flourishing. The company continued to strengthen its digital and eCommerce forces across all banners. The eCommerce sales reached CAD 600 million in the quarter, far beyond full-year eCommerce sales achieved in 2019.

• Solid eCommerce Performance in the Second Quarter: During the quarter under consideration, Canadian Tire's eCommerce sales grew by 400%, led by 500% growth at CTR. eCommerce demand peaked in April and May during store closures. Digital traffic increased 75% across all banners and over 100% at CTR. 

• Strong cash position and financial flexibility: The group had a new credit facility from five Canadian financial institutions worth CAD 710 million. The company ended the second quarter with CAD 2.3 billion in cash and marketable securities, including a CAD 700 million pre-emptive draws on the note purchase facility with Scotiabank.

• Hovering Over Long-term and Short-term Support Levels: At the last closing, CTC.A shares traded well above the crucial long-term as well as short-term support levels of 200-day, 50-day and 30-day SMAs, which implies a bullish price trend in the stock.

Technical Chart (as on October 19, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

Q2FY20: Financial overview

Source: Company

• The consolidated revenue decreased CAD 524.8 million, or 14.2%. Excluding Petroleum, consolidated revenue decreased CAD 253.6 million, or 8.0% in the quarter, primarily due to store closures at SportChek, Mark's and Helly Hansen.

• Diluted EPS were (CAD 0.33), normalized diluted EPS were negative (CAD 0.25), compared to normalized diluted EPS of CAD 2.97 in the prior year, due to COVID-19 and its effect on consumer purchasing behaviour and the global economy.

Retail Segment Financial information

Source: Company

Retail segment revenue decreased by 15.2%. Excluding Petroleum, Retail segment revenue decreased 8.4%, primarily due to store closures at SportChek, Mark’s and Helly Hansen.

• Canadian Tire retail sales increased by 20.3% on a YoY basis
• SportChek retail sales decreased by 24.9% on a YoY basis
• Mark’s retail sales were down by 36.4% on a YoY basis
• Helly Hansen revenue in the quarter was CAD68.9 million, a decrease of 21.4% on a YoY basis

Dividend

The Company has declared dividend payable to holders of Class A Non-Voting Shares and Common Shares at a rate of CAD1.1375 per share payable on December 1, 2020 to shareholders of record as of October 31, 2020.

Risks associated to investment

The company is exposed to the new wave of the virus outbreak, as it can weigh on the group’s performance in coming time. Further, the changing consumer preferences and expectations related to eCommerce, online retailing and the introduction of new technologies also features as a potential risk. The performance of the company’s businesses is prone to several other risks, including, liquidity, supply chain disruptions, changes in consumer behavior, competition, and foreign exchange. 

Valuation Methodology (Illustrative) – Price to Earnings

 Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation

The group’s performance in the second quarter of FY20 is moderate, with Canadian Tire retail sales increased by 20.3% on a YoY basis; however, SportChek retail sales and Mark’s retail sales underperformed against the year over period. Further, the company continued to strengthen its digital and eCommerce infrastructure across all banners. We believe that the company will gradually return to more normal revenue levels during Q3 and Q4 of 2020. Also, CTC.A shares are offering a decent dividend yield of ~3.0% amid falling interest rate scenario across the world, with a consistent track record of dividend payment. Further, its shares are hovering in a bullish zone, as its shares traded above the 200-day, 50-day and 30-day SMAs. Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 152.41 on 19 October 2020. We have considered Metro Inc, Alimentation Couche-Tard Inc, and Loblaw Companies Ltd etc. as the peer group for the comparison.

1-Year Price Chart (as on October 19, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

Quebecor Inc.

Quebecor Inc. (TSX: QBR.B) is a telecommunications and media company. The Company's segments include Telecommunications, Media, and Sports and Entertainment. The Telecommunications segment offers television distribution, Internet access, business solutions, cable and mobile telephony and over-the-top video services in Canada. The operations of the Media segment in Quebec include the operation of an over-the-air television network and specialty television services; the printing, publishing and distribution of daily newspapers; the operation of Internet portals and specialized Websites; the distribution and production of music, and the operation of an out-of-home advertising business.

2QFY20 Financial Highlights: The company posted total revenue of CAD1.00 billion in the second quarter of 2020, reflecting a CAD 53.1 million or 5.0% decline from the same period of 2019. Revenues decreased in the Media segment by CAD 57.4 million or 30.2% and in the Sports and Entertainment segment by CAD 15.4 million or 37.3%. Revenues from the Telecommunications segment increase by CAD 14.7 million or 1.7%. The company reported net income attributable to shareholders as CAD 174.9 million (CAD 0.69 per share) in the second quarter of 2020, compared to CAD 140.2 million (CAD 0.55 per share) in the same period of 2019, an increase of CAD 34.7 million (CAD 0.14 per share).

Source: Company

Segment information (in millions of Canadian dollars)

Source: Company

• Mobile telephony and cable telephony segments along with equipment sales has shown an increase in revenue, rest all segments reported a fall in their revenues on Y-o-Y basis. 

Dividend

On August 5, 2020, the company declared a quarterly dividend of CAD 0.20 per share on its Class A Shares and Class B Shares, payable on September 15, 2020 to shareholders of record as of the record date of August 21, 2020.

Risks associated to investment

The pandemic had a significant impact on the company. This crisis reduced operations of many of the company’s business partners that led to a substantial slowdown in many of the group’s segments in the first half of 2020. Continuation of such trends may drag down the company’s financial performance. 

Share price performance

Source: Refinitiv (Thomson Reuters), Chart reflects daily closing price 

Valuation Methodology (Illustrative) – Price to Earnings

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation

The business is categorized under the essential services and did not face suspension in its operations, which is a positive. The company showed excellence in its operations and financial management, combined with higher quarterly growth as compared to the major national industry players, which is commendable looking at the current economic scenario. The company’s subsidiary TVA Group reported an increase of 1.8 percentage points in its market share to 42.3%, which is impressive. The company retains a solid financial position and is evaluating and prioritizing investing in strategies that will be profitable over the long-term, thereby maintaining its position as an innovation leader.

Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 32.96 on 19 October 2020. We have considered Telus Corp, Shaw Communications Inc, Cogeco Communications Inc etc., as the peer group for the comparison.

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.