K-Bro Linen Inc (TSX: KBL) is a healthcare and hospitality laundry and linen processor in Canada. It operates in major cities across Canada and UK, along two distribution centers, providing management services and laundry processing of hospitality, healthcare, and specialty linens.

Investment highlights 

• An income play:  The Company has an excellent track record of dividend distribution reflecting resilience and healthy cash flow generation. Recently, the Company declared a dividend of CAD 0.300 per common share. Additionally, the stock is offering a healthy dividend yield of 3.19%, which looks decent considering the current macros and interest rates.

• Stable base of annual recurring: K-Bro stands apart in this competitive sector for its ability to produce goods and services that add value to its customers. The healthcare and hospitality sectors of the laundry and linen services industry, according to management, represent a stable base of annual recurring business with prospects for expansion as the number of healthcare beds increases over time.
  

• Elevated cash from operations: During Q3 2021, cash generated by operating activities stood at CAD 12.5 million compared to cash used in operating activities of CAD 0.5 million in Q3 2020. While on a year-to-date basis, cash generated by operating activities also increased to CAD 24.1 million compared to CAD 17.4 million in 2020.

• Strong financial position: The Company's debt to total capital ratio was 17.1% as of September 30, 2021, down from 17.9% as of December 31, 2020. It also has a CAD 60.0 million unused revolving credit facility. Furthermore, the company reported CAD 30.5 million in net working capital, up from CAD 27.9 million on December 31, 2020. The management also feels that its capital resources are sufficient to meet its obligations, sustain operations, and fund its expansion plans.

Source: Company

Financial overview of Q3 2021 (Expressed in thousands of Canadian dollars)

Source: Company 

• The company’s consolidated revenue in Q3 2021 increased to CAD 61.5 million or by 19.5% compared to CAD 51.4 million in pcp, as the restrictions from the COVID-19 pandemic were being eased which drove stronger hospitality client activity and the continued strength of healthcare revenues.
• On the back of higher wages and other higher expenses, the company’s total expenses in the reported period increased to CAD 49.8 million against CAD 38.7 million in pcp.
• EBITDA decreased in Q3 2021 to CAD 11.6 million from CAD 12.7 million in 2020, which is a decrease of 8.8%, mainly due to higher operating expenses.
• Net income fell at CAD 2.1 million against CAD 3.4 million.
  

Risks associated with investment

Since the company provides its services to the hospitality sector and commands a significant part of the revenue from it, any continuation of the travel ban is likely to impact on the cash generation capacities of the business.

Valuation Methodology (Illustrative): EV to EBITDA based

Stock recommendation

The company posted good financial results for the third quarter of 2021, with adjusted EBITDA of CAD 9.3 million and an adjusted EBITDA margin of 15.1 percent. In addition, it had a significant recovery in its hotel business in the quarter, although extremely tight labor markets in several of the areas where the firm operates resulted in higher expenses to handle the volumes. The company recently signed a new 11-year contract to supply laundry and linen services for AHS province-wide, which is expected to generate an additional CAD 10.0 million in annual revenue with margins consistent with past adjusted EBITDA margins. Also, with the easing lockdown restrictions, we expect a gradual recovery in the hospitality sector, which could support the overall performance of the company. Hence considering the aforesaid facts, we recommend a “Hold” rating on the stock at the closing price of CAD 37.57 on November 11, 2021.

One-Year Technical Price Chart (as on November 11, 2021). Source: REFINITIV

The Valens Company Inc.

The Valens Company Inc. (TSX: VLNS) is a developer and manufacturer of cannabinoid-based products. The company's extraction methods are CO2, ethanol, hydrocarbon, solvent-less, and terpene extraction. Its products are tinctures, capsules, beverages, and vape cartridges, among others.

Key Updates:

• Expanding footprint across the Québec Market: Recently, the company is expanding its presence across the Québec. The above region drives ~15% of Canadian cannabis retail sales and hence ample scope of opportunities for the company in the coming days.
  

• New capacity addition: During the quarter, the Company commenced its first shipments of cannabis derivative products from its newly operational K2 Facility at Kelowna location. The above facility provides a a wide range of products such as crumble, beverages, THC drops, vapes, and tinctures. Additionally, the company already completed its construction of its Pommies facility and is expected to be operational in Q4FY21. Notably, the above facility would be utilized for the production of cannabinoid-based beverages.

• Management Highlights: On October 19, 2021, the company reported that it hired Antoine Awwad for the position of VP of Marketing and Business Development.

• Agreement with Epsilon: During the third quarter of FY21, the company reported its collaboration with Epsilon, which operates in diversified global healthcare and pharmaceuticals products. With the above agreement, the company is focusing to mark its presence (through offering innovative suite of cannabis products) across the Australia and New Zealand through the utilizing Epsilon's Southport GMP manufacturing facility.

Q3FY21 Financial Highlights:

• VLNS announced its quarterly results, wherein the company posted net revenue of CAD 24.569 million, significantly higher than CAD 18.517 million in Q3FY20. The increase in net revenue was driven by the contribution of Green Roads, which was acquired during the third quarter of FY21.
• The group reported a gross profit of CAD 5.629 million, lower than CAD 7.313 million in Q3FY20. The decline was primarily due to a surge in Cost of sales (CAD 15.242 million v/s CAD 10.311 million in pcp).
• The company witnessed higher input costs due to sharp increase in advertising, commission, and selling costs, higher General and administrative expenses coupled with Management and consulting fees. Loss from operations stood at CAD 13.875 million, as compared to a loss of CAD 3.362 million in pcp.
• Net loss widened to CAD 12.799 million, from a loss of CAD 3.064 million in pcp, due to higher input costs as mentioned earlier, partially offset by recovery of income taxes.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: Change in the consumer preferences and entry of new products might lead to a decline in the company’s overall sales volume. Moreover, the company is battling with steep rise in the input costs, and continuation of the above trend would dampen the company’s cash flows and profitability.

Valuation Methodology (Illustrative): EV to Sales based

Stock Recommendation:

During the quarter, the company reported the acquisition of Citizen Stash Cannabis Corp. which has more than forty provincial listings and is expected to support the company’s sales volumes in the coming years. We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Trulieve Cannabis Corp, Rubicon Organics Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the last traded price of CAD 1.81 on November 11, 2021.

One-Year Technical Price Chart (as on November 11, 2021). 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.