AirBoss of America Corp

AirBoss of America Corp (TSX: BOS) is a Canada based manufacturer of rubber-based products for the resource, military, automotive and industrial markets. The group is mainly operating in three segments: Rubber Compounding, Engineered Products and Automotive.

Key highlights 

• Acquired 100% ownership of AirBoss Defense Group: The company completed an acquisition with 100% ownership of AirBoss Defense Group ("ADG") effective October 26, 2020, by purchasing 45% minority interest held by Critical Solutions Holdings. AirBoss Defense has been a game-changer for the company as it helped the company to post record numbers. 

• Global Leader in CBRN Wearables: The company is the sole supplier to US Department of Defence chemical, biological, radioactive, nuclear (CBRN) boots and gloves. The company has pocketed the contracts worth USD380 million since Oct 2018.

• Sound Liquidity:  The Company expects to fund its remaining 2020 operating cash requirements, including required working capital investments, capital expenditures and scheduled debt repayments from cash on hand, cash flow from operations and its committed borrowing facilities.

• Free cash flow: In Q3 2020, the company generated Net free cash flow of USD 13.9 million as against USD 7 million in the previous corresponding period. 

Financial overview of Q3 2020

Source: Company 

• Consolidated net sales reported by the Company in Q3 2020 increased by 110.9% to USD 162.745 million compared to USD 77.1 million in the previous corresponding period, due to PAPR sales under the FEMA and HHS contracts, supported by the completion of the merger between the AirBoss Defense business.

• Operating income reported by the Company in Q3 2020 increased by USD 26.3 million to USD 28.9 million as against USD 2.6 million in Q3 2019, based on low COGS and high revenues.

• COGS as a % to revenues in Q3 2020 stood at 71.9% as compared to 86.2% in the previous corresponding period.

• Net profit in the reported quarter stood at USD 21.1 million as against USD 1.5 million in Q3 2019, while the profit attributable to shareholders of the Company for this quarter came in at USD 11.6 million.

Revenue bifurcation

Source: Company

Dividend

The company paid a quarterly dividend of USD 0.07 per share on 15^th Oct 2020.

Risk associated with investment 

A significant risk factor that the Company is exposed to is price risk concerning commodity prices. Commodity price risk has the potential to adversely affect the business, operations, and financial results. Other risk factors involved for the Company are economic conditions, dependence on key customers, cyclical trends in the tire and automotive, and other vital industries, as well as sufficient availability of raw materials at economical costs. 

Valuation Methodology (Illustrative): Price to Cash Flow

Stock recommendation

The company reported a robust performance in 3QFY20 as sales increased by 110.9%, and a healthy balance sheet with USD 43 million in cash and cash equivalents and access to approximately USD 60 million in unutilized credit facilities. The company has acquired 100% shares of AirBoss Defense Group, which is a key positive. Further, the company reduced net debt to TTM EBITDA from 1.85 times at December 31, 2019 to 0.25 times at September 30, 2020, providing the Company with enhanced flexibility to act on both organic and inorganic growth opportunities. Therefore, based on the above rationale and valuation, we have given a ‘Speculative Buy’ rating at the closing price of CAD 16.60 November 18, 2020. We have considered Chorus Aviation Inc, Park Lawn Corp, Cargojet Inc etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Pizza Pizza Royalty Corp.

Pizza Pizza Royalty Corp. (TSX: PZA) operates in a quick-service restaurant (QSR) business and offers pizzas and other food items to its customers. The company derives its royalty income from more than 700 restaurant outlets.

Key highlights of Q3 2020

• The company announced a 10% increase to its monthly dividend. As a result, the November dividend increased to CAD 0.055 from CAD 0.05 per share. At the last traded price, the stock was offering a dividend yield of 7.28%, which is lucrative considering the current interest rate environment.
• New restaurant construction continues across Canada as government-mandated restrictions on commercial construction have been lifted in all provinces. We expect accelerated restaurant network expansion and increased renovations in 2021, assuming pandemic effects are mitigated in the coming months.

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the company reported a decrease of 9.4% in Total System Sales from the 749 restaurants in the Royalty Pool to CAD 125.4 million as compared to CAD 138.5 million in Q3 2019 when there were 772 restaurants in the Royalty Pool.
• The decline in sales number was majorly attributed to 9.5% lower same-store sales as a direct result of the COVID-19 pandemic and the government-mandated social distancing policies.
• The group’s delivery and pickup sales, mainly through digital channels, grew significantly throughout the quarter offsetting a significant decline in sales numbers.
• The company reported adjusted earnings to shareholders of CAD 4.9 million in Q3 2020, as compared to CAD 5.1 million in Q3 2019. 

Risks associated with investment

The industry might witness setbacks from lower consumer demand, due to a decline in consumer expenditure and a change in consumer taste and preference.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

The Company's ability to provide a wide range of products to multinational customers on a global basis, with focused strategies to improved efficiency and lower costs is going to help them a lot in improved numbers and margins. During the period, the group opened five traditional Pizza Pizza restaurants and two non-traditional locations. The Company is deriving a significant chunk of its revenues via a delivery segment, as the Company has relaunched its digital ordering app, which is likely to be a sales driver in the future. Therefore, based on the above rationale and valuation, we have given a ‘Speculative Buy’ rating at the closing price of CAD 9.07 on November 18, 2020 with a double-digit (percentage-wise) upside potential, based on the Industry (Consumer Cyclicals) Median NTM P/E multiple of 13.0x.

Daily technical chart. Source: Refinitiv (Thomson Reuters)

Disclaimer

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