Primo Water Corp

Primo Water Corporation (TSX: PRMW) operates in the beverages segment and provides water solutions. The company is based out of Canada. The Group also offers bottled water with office and home delivery. The company also sells self-service refill drinking water, purified bottled water and water dispensers in Canada and the USA.

Recently, the company announced the acquisition of the assets of Mountain Glacier LLC located in Texas and Tennessee. The company provides refreshing spring water and quality customer service for its more than 2,500 customers in Tennessee and Texas.

Q2FY20 Financial Highlights: PRMW announced its second quarter results, wherein the company posted revenue of USD 456.8 million, as compared to USD 455.6 million in the previous corresponding period (pcp). The quarter was marked by higher income from the United States, while a significant decline from the United Kingdom and all other countries. Gross profit stood lower at USD 254.7 million, against USD 271.6 million in Q2FY19 due to higher cost of sales. The company posted an operating loss of USD 114.0 million, as compared to a profit of USD 21.5 million in pcp, due to inclusion of goodwill and intangible asset impairment charges amounting to USD 115.2 million in the current quarter. The company posted a net loss of USD 136 million as compared to a net profit of USD 4.4 million in pcp. The company ended the quarter with cash and cash equivalents of USD 211.1 million, while total assets were reported at USD 3,653.7 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company has posted a lower revenue from the U.K. region and from the rest of the world due to a soft demand scenario on account of economic slowdown. Continuation of the above trend might hamper the group’s performance.

Valuation Methodology: EV/EBITDA Relative Valuation (illustrative)

Stock Recommendation: The stock of PRMW has gained ~11% in the last one year and outperformed the benchmark index by ~17%. The recent acquisition of Mountain Glacier LLC would help the company with added clients which augur well for improved business prospects. The company has retained its top-line, amidst the ongoing economic jolt, which is impressive. Furthermore, the company reported growth from its biggest market, i.e. the U.S., which is a key positive, and we expect a revival in demand from the U.K. geography, which would further support the company’s performance. The company’s business is categorized as ‘essentials’, and due to the nature of the business coupled with the recent acquisition, we expect a stable income in the coming years. The stock gained ~60% in the last six months and was trading above the 200-days simple moving average of CAD 17.49, indicating a bullish pattern. We have valued the stock using the EV to EBITDA based relative valuation approach and arrived at a target price offering single-digit upside potential. For the said purpose, we have considered the industry median (Consumers non-cyclicals). Considering the above-mentioned facts, current price movements, we recommend a ‘Hold’ rating in the stock at the closing market price of CAD 18.94 on September 21, 2020.

PRMW Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Tourmaline Oil Corp

Tourmaline Oil Corp (TSX: TOU) is a Canada-based company engaged in oil and gas exploration and production business sector.

Pros:

• Investment Grade Credit Rating, which helps validate the overall financial health of Tourmaline as a stable, low-risk oil and gas producer.
• Consistent Dividend payment track record. The Board of Directors has declared a quarterly cash dividend of CAD 0.12 per common share amid a time when the sector is going through a steep pain, which shows the financial flexibility of the company.
• Offering a free cash flow yield of 3.9%. In the second quarter of FY20, the company delivered a free cash flow of CAD 121.3 million.
• Strong balance sheet with adequate liquidity, significantly lower balance sheet risk with Debt/Equity ratio of 0.23x at the end of Q2FY20 vs Industry median of 0.94x and interest coverage ratio stood at 6.19x.

Cons

• Volatility in the energy prices can have a detrimental impact on the company’s financial performance.
• Higher cash conversion cycle of 52.7 days can pose some liquidity risk amid falling energy prices.

2QFY20 Highlights

• At June 30, 2020, the Company has CAD 149.7 million in cash and CAD 1.1 billion in unutilized borrowing capacity on its credit facilities, which reflects ample financial liquidity.
• The Company has increased its monitoring of receivables due from petroleum and natural gas marketers and from joint asset partners to manage credit risk. The Company historically has not experienced any collection issues with petroleum and natural gas marketers as a significant portion of these receivables are with creditworthy purchasers
• Production for the three months ended June 30, 2020 averaged 299,369 boe/d, a 7% increase over the average production for the same quarter of 2019 of 280,547 boe/d.
• The production increase for the three months ended June 30, 2020 is a result of the Company’s successful exploration and production program combined with corporate and property acquisitions completed in the first half of 2020.
• The realized average natural gas price for the three months ended June 30, 2020 increased by 16% to $2.41/mcf from $2.07/mcf in the same period of the prior year.

Technical Analysis

• TOU shares are hovering in bullish territory. At the last closing price, its shares traded well above the short-term and long-term support levels of 5-day, 10-day, 20-day, 50-day, 100-day and 200-day SMAs.
• The leading momentum indicators 14-day and 9-day RSI oscillator hovering in a neutral zone and tilted towards the overbought zone
• The Moving Average Convergence Divergence is rising with the difference between 12-day and 26-day EMA is positive, another bullish indicator.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV/EBITDA based relative valuation

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Stock Recommendation:  The company performance was decent in the second quarter of FY20, driven by a 16% surge in the natural gas prices on a YoY basis. The increase was driven by significantly higher Canadian natural gas benchmark prices, including AECO and Station 2, compared to the same period of the prior year.

Also, the company is generating decent free cash flow and a consistent dividend payer. Further, its shares are hovering in the bullish zone.  At the last closing price, its shares traded well above the short-term and long-term support levels.

Therefore, based on the aforementioned facts, we have given a “Hold” recommendation at the closing price of CAD 16.59 on September 21, 2020.

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.