Home Capital Group Inc.

Home Capital Group Inc. (TSX: HCG) is a specialty finance company that offers residential and commercial mortgage lending.

Key Highlights:

• Growth From Oaken Channel: The company reported a consistent growth from its Oaken Financial, wherein deposits grew 13.3% from Q2FY20 to Q2FY21. Notably, the company’s share of total deposits from the above segment stood at 30.9% at the end of Q2FY21, improved from 29.5% and 26.2%, respectively, at the end of Q1FY21 and Q2FY20.
• Declining non-performing loans and credit allowance: The company reported strong operational efficiency and has consistently lowered its net non-performing loans and credit allowance, which is encouraging considering the ongoing economic sluggishness. We expect the continuation of the above trend is likely to benefit the company’s operations in the coming years.
• Improving Financial Metrics: Despite the ongoing economic challenges, the group has increased its financial performance and reported y-o-y growth in book value per share, earnings per share and a higher return on equity.

Q2FY21 Financial Highlights:

• HCG announced its second quarter result, wherein the company posted total revenue of CAD 138.860 million, which came in higher from CAD 132.308 million in pcp. The increase was driven by higher net interest income (CAD 123.742 million v/s CAD 115.815 million in pcp). Meanwhile, non-interest income slide to CAD 15.118 million, v/s CAD 16.493 million in pcp.
• Non-performing loans stood at 0.24% of gross loans in Q2FY21, improved from 0.38% in Q1FY21 and 0.42% at the end of Q2FY20.
• Net interest margin stood at 2.61%, improved from 2.4% in pcp.
• Net Income jumped to CAD 72.756 million, from CAD 34.132 million in pcp.
• Loans under administration stood at CAD 22.82 billion at the end of Q2FY21, up 0.2% from Q1FY21.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s performances might be hindered due to the extension of the ongoing pandemic, as it would impact the overall consumer credit and might lead to higher non-performing loans. Despite strong performance from Oaken Financial, total deposits fell from y-o-y and q-o-q basis, and continuation of the above trend might dampen the company’s overall performance.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation: The company is strategizing to utilize the growing demand from the housing segment and would diversify its funding options and adding new capabilities that would drive consistent growth. Moreover, to attain long-term growth, the company is focusing on offering competitive products, increasing outreach within the broker community and enhancing service experience through technological innovation and process re-engineering. We have valued the stock using the P/E-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Equitable Group Inc, AGF Management Ltd etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 37.45 on September 10, 2021.

One-Year Technical Price Chart (as on September 10, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Village Farms International Inc.

Village Farms International Inc. (TSX: VFF) owns and operates agricultural greenhouse facilities and produces, markets, and sells tomatoes, bell peppers, and cucumbers.

Key Highlights:

• Acquisition: On August 16, 2021, the company reported the acquisition of Balanced Health Botanicals including its established e-commerce platform, CBDistillery™ at a price consideration of   USD 75 million, through USD 30 million in cash and the rest through common shares of VFF. The above would provide immediate access to the US retail CBD market through its well-established brands, profitable business, prominent E-commerce platform, established retail channels and a growing customer base.
• Encouraging Top-line performance: The company reported strong top-line growth of USD 122.770 million, as compared to USD 102.208 million a year ago. The growth was driven by the positive impact of store openings across Canada coupled with favorable brand performance and higher market share.
• Launch of Cannabis Products: The recent launch of Cannabis Derivate Products also supported the growth. Within the non-branded segment, the operations were benefited from store openings and the growth of the Cannabis Derivate Products, which in turn increased demand for cannabis biomass sold to other licensed producers (LPs). We believe the above momentum to continue in the coming days, supported by higher traction from high-potency flower, trim and Cannabis Derivate Products.
• Management Update: On August 30, 2021, the company reported the appointment of Alejandro de Gortari for the post of Chief Financial Officer. 

Q2FY21 Financial Highlights:

• VFF announced its quarterly results, wherein the group reported sales of USD 70.374 million, jumped from USD 573 million in pcp. The increase was driven by strong growth from the Cannabis segment amounting to USD 24.761 million v/s USD 9.386 million in pcp.
• Gross margin stood at USD 5.265 million, climbed from USD 3.529 million in pcp, supported by elevated sales, partially offset by higher cost of sales.
• The quarter was marked by significantly higher selling, general and administrative expenses, an increase in interest expense, and higher share-based compensation.
• Net loss widened to USD 4.517 million, from USD 0.119 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Reports)

Risks: Despite a surge in income, the company reported higher loss, and continuation of the above trend would dampen the overall performance of the company.

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendation:

VFF is one of Canada’s best Selling Cannabis Brands, which offers products like dried flower, vapes, bottled oil etc. Moreover, the recent acquisition of BHB would expands the company’s footprint across the US market, wherein the opportunity for hemp-derived CBD products remains very high.  We have valued the stock using EV to Sales based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered industry median on NTM basis. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 10.83 on September 10, 2021.

One-Year Technical Price Chart (as on September 10, 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.