North West Company Inc

North West Company Inc. (TSX: NWC) is a leading retailer of food and everyday products and services to rural communities and urban neighborhoods across Canada, Alaska, the South Pacific and the Caribbean. The company also offers services, including post offices, income tax return preparation, money transfers, commercial business sales and others.

Key Highlights:

• Strong same-store sales, driven by a shift in consumer pattern: Due to strict travel norms, there has been a major shift in consumer preferences, which has resulted in an increase in local retail demand. Consumers preferred to order from online or phone, which fueled the pick-up or delivery services in the recent past and led to growth in same-store sales. For nine months ended October 31, 2020, the company reported a sales increase of 16.4% on y-o-y basis to CAD 1.794 billion, which is a key positive. Moreover, majority of sales growth were recorded in essential product & service categories during the pandemic. We expect the momentum to continue in the coming quarters. 

• Cost-reduction strategies to support the company’s margins: In the recent past, the company worked on cost-efficiency strategies. NWC continued to invest in lower food pricing across the northern Canada stores and also focused on sales growth opportunities of COVID-19, such as optimizing North Star Air Ltd. cargo business, completion of roll-out of next-generation merchandise and store systems and shifted to a more decentralized operation structure. Moreover, the sale of Giant Tiger Transaction has resulted in lower Canadian administration cost which is a key positive. 

• Event Update: The company would disclose its fourth quarter result for year ended January 31, 2020 on April 07, 2021.

Financial Highlights for three months ended October 31, 2020:

• NWC announced its quarterly result, wherein the company posted sales of CAD 552.975 million, v/s CAD 519.521 million in the previous corresponding period (pcp). The increase was driven by strong momentum within the food segment from both International and Canada.

Q3FY20 Segment Highlights (Source: Company Reports)

• Gross profit stood higher at CAD 185.064 million, v/s CAD 169.307 million in pcp, thanks to higher sales, while a higher cost of sales (CAD 367.911 million v/s CAD 350.214 million in pcp) remained a drag.
• Earnings from operations stood at CAD 52.934 million, surged from CAD 36.990 million in pcp. The increase was driven by higher gross profit coupled with slightly lower selling, operating and administrative costs (CAD 132.130 million v/s CAD 132.317 million in pcp).
• Net earnings stood at CAD 35.914 million, increased from CAD 24.838 million, a year ago.
• The group reported a cash balance of CAD 59.712 million, while total assets were recorded at CAD 1,212.470 million.

Q3FY20 Income Statement Highlights (Source: Company Report)

Risks: Due to the COVID 19 pandemic, the group reported an increase in wage for front-line associates coupled with higher expenses for protective equipment and enhanced sanitation, which has accelerated the input costs for the company.

 Valuation Methodology (Illustrative): P/E based valuation

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

Stock Recommendation:

The group reported a solid growth in its cash from operations, which stood at CAD 232.058 million for nine-months ended October 2020 v/s CAD 112.797 million a year ago. Moreover, the group has maintained its dividend and distributed CAD 49.748 million during the same period v/s CAD 48.262 million, a year ago, supported by strong growth in cash flows. Moreover, the stock is offering a dividend yield of ~4.0%, which is decent amid low interest rate environment. 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 Sleep Country Canada Holdings Inc, Premium Brands Holdings Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of NWC at the closing market price of CAD 36.46 on March 29, 2021.

One-Year Price Chart (as on March 29, 2021). Source: Refinitiv (Thomson Reuters)

Intertape Polymer Group Inc.

Intertape Polymer Group Inc. (TSX: ITP) manufactures and sells a variety of packaging products. The firm's primary product categories include tapes, films, and woven coated fabrics. The company's tapes include pressure-sensitive and water-activated carton sealing tapes, and flatback, duct, double coated, foil, electrical, and filament tapes. 

Key Highlights:

• Diverse Revenue-base: The company derives its revenue from several industries and is hardly dependent on a particular sector, which lowers the risk-profile. Moreover, due to the change in consumer preference, the group is witnessing strong momentum from the e-commerce segment.                    

Diversified Porfolio (Source: Company Presentation)

• FY21 Outlook looks impressive: For FY21, the group expects higher revenue and expect it to be in between USD 1.3 billion to USD 1.4 billion. Free cash flow is expected in between USD 80 million to USD 100 million while Adjusted EBITDA is anticipated in between USD 220 million to USD 240 million. For FY21, the group is likely to invest USD 100 million, in order to expand production capacity within the company’s existing operational footprint to cater the growing demand from the customers. In addition to this, the group would install a new water-activated tape to meet the additional demand arising from the e-commerce channel.

Source: Company Presentation

FY20 Financial Highlights:

• ITP announced its full-year result, wherein the company posted revenue of USD 1,213.028 million, as compared to USD 1,158.519 million in FY19. The increase was driven by higher revenue from Canada and the United States.
• Gross profit stood at USD 288.784 million, increased from USD 246.875 million in the previous financial year.
• Operating profit was recorded at USD 115.774 million versus USD 92.538 million in FY19. The period was marked by higher selling, general and administrative expenses (USD 157.486 million v/s USD 136.674 million in FY19) and a slide in research expenses (USD 11.196 million v/s USD 12.527 million in FY19).
• Net earnings stood at USD 73.455 million, higher than USD 41.224 million in the previous year.

FY20 Financial Highlights (Source: Company Report)

Risks: Better value propositions by the competitors might lead to price competition, which might dampen the margin. Moreover, a rise in raw material prices could also lead to margin erosion.

Valuation Methodology (Illustrative): P/CF based valuation

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

Stock Recommendation:

The company is witnessing strong demand from the end-users due to a change in consumer preference for packaging and protective solutions, which is a key positive. Additionally, the company is investing in innovative packaging for providing better value propositions, which is likely to improve the company’s market share. For FY20, the company reported a higher adjusted EBITDA margin of 17.4% compared to 14.9% in FY19, indicates operational efficiency and better revenue mix, which is a key positive. The group distributed a higher dividend of USD 35.386 million in FY20, v/s USD 33.992 million and USD 32.776 million in FY19 and FY18, respectively, which is encouraging. We have valued the stock using the Price to CF based relative valuation method and have arrived at a higher-single-digit upside (in percentage terms). For the said purposes, we have considered industry (Containers & Packaging) median on NTM basis. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of ITP at the closing market price of CAD 28.94 on March 29, 2021.

One-Year Price Chart (as on March 29, 2021). Source: Refinitiv (Thomson Reuters)

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.