Exchange Income Corporation

Exchange Income Corporation (TSX: EIF) is a diversified acquisition-oriented company which operates across sectors like aerospace, aviation services and equipment, and manufacturing.

Key Highlights:

• An income Play: Over the years, EIF has paid a constant dividend to its shareholders, which indicates a stable cash flow generating capabilities of the group. The group paid a total dividend of CAD 59.812 million in 9MFY20, higher than CAD 52.978 million, a year ago. Moreover, at the last closing price, the stock was offering a dividend yield of ~6.046%, which is lucrative, considering the current interest rate environment.

Five-year Dividend History (Source: Refinitiv, Thomson Reuters)

• Performance improved from the previous quarter: The group’s performance improved from the previous quarter. Revenue increased to CAD 297.3 million compared to CAD 243.7 million, while net earnings improved to CAD 17.2 million from CAD 2.6 million, which is encouraging.
• Improved Cash flows: Despite the ongoing sluggish economic scenario, the company posted a higher cash flow from operations, backed up by improved working capital management. For the 9MFY20, the group reported cash from operations of CAD 196.0886 million, higher than CAD 151.171 million, a year ago. We believe the momentum to continue in the coming days, supported by improved profitability and prudent working capital management.

Source: Company Reports

Q3FY20 Financial Highlights:

• EIF announced its quarterly results, wherein the company posted revenue of CAD 297.286 million, lower than CAD 355.164 million in the previous corresponding period. The decline was primarily attributed to significantly lower revenue from Aerospace & Aviation (CAD 170.846 million versus CAD 266.471 million in pcp). However, a higher income from manufacturing segments (CAD 126.440 million versus CAD 88.693 million in Q3FY19) partially supported the top line.
• The quarter was marked by a lower expense of CAD 214.051 million versus CAD 266.162 million in pcp. The increase was driven by a slide in aerospace & Aviation expenses - excluding depreciation and amortization (CAD 87.330 million versus CAD 146.948 million in pcp) and lower general and administrative costs (CAD 40.542 million versus CAD 53.513 million in pcp), partially offset by higher manufacturing expense (CAD 86.179 million versus CAD 65.701 million in pcp).
• The company reported net earnings of CAD 17.244 million, versus CAD 28.990 million in pcp. The decline was due to higher depreciation costs, an increase in income tax expense, inclusion of other income in Q3FY19, partially offset by a lower finance cost.
• Cash and cash equivalents stood at CAD 82.562 million, while total assets were recorded at CAD 2,387.183 million.

Income Statement Highlights (Source: Company Reports)

Risks: The company derives a major portion of the revenue from the aviation industry, and restrictions imposed on account of COVID-19 pandemic caused a major impact on the aviation sector. Continued pain in the aviation sector might affect the group’s performance.

Valuation Methodology (Illustrative): EV to Sales based

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

Stock Recommendation:

The group recorded an improved performance in 3QFY20 compared to the previous quarter. The group’s manufacturing segment continues to perform better amid crises. Passenger levels continue to improve, off the initial lows, reflects the changing environment in the aviation sector. Further, to withstand the continuing industry slowdown, the organization took prudent measures and lowered its capital expenditure. The stock closed above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend. We have valued the stock using EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Cargojet Inc, Chorus Aviation Inc etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 37.71 on January 15, 2021.

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

HLS Therapeutics Inc

HLS Therapeutics Inc (TSX: HLS) is a Canada-based company specialized in the pharmaceutical industry. The Company acquires and distributes commercial stage and branded pharmaceutical drugs for the North American markets. The Company focuses mainly on treatment products for the central nervous system and cardiovascular specialties in Canada.

Key highlights

• Management update: On 21st December 2020, the Company announces that John L. Welborn will be nominated for election to the Company's board of directors. John is presently the Managing Director, Co-Chief Investment Officer for Stadium Capital Management, LLC, the largest shareholder of HLS and owns approximately 18.8% of the Company's issued and outstanding common shares. 

• A growth story in the making:The company is pursuing to launch additional products in the central nervous system and cardiovascular therapeutic markets, and in other therapeutic areas through targeted business development efforts. With the help of the “Vascepa”, the company expects a blockbuster potential, which could generate the revenue of CAD 275-325 million with an Adjusted EBITDA ranging between CAD 100-130 million by FY2025. The consolidated revenues are expected to be around CAD 430 million by 2025.

Source: Company

• Stable financial position: At present, the Company has cash of USD 20.9 million and positive working capital. The Company believes that its cash balances and cash flow from operations would be sufficient to fund its operating activities for the ensuing twelve-month period. Besides this, the undrawn revolver facility is available to the Company. Debt increased in the third quarter as the Company drew down its senior secured term loan to finance the royalty acquisition.

Source: Company

Financial overview of Q3 2020

Source: Company

• The company generated revenue of USD 13.1 million in Q3 2020, as against USD 13.4 million in the previous corresponding period. This revenue number reflects the resiliency of the Company’s Clozaril franchises in Canada and the United States and the increasing momentum of the Vascepa introduction in Canada, partly offset by royalty revenues.
• In Q3 2020, the company posted an operating loss of USD 1.7 million as against a loss of USD 0.7 million in Q3 2019, primarily on higher COGS and SG&A expenses.
• Net loss stood at USD 1.7 million, compared to a net loss of USD 2.0 million in the previous corresponding period. 

 Risks associated with investment

The company is exposed to various risks factors, including risks related to the specialty pharmaceutical industry, economic factors, and many other factors that are beyond the management’s control. Future growth of the company is highly dependent on the performance of VASCEPA. Any deviation from the forecasted performance may adversely affect the company.

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock recommendation

The Company's leading product Clozaril continues to lead the market for treatment-resistant schizophrenia in Canada. The Company is improving and enhancing the CSAN service. The Company is also working with leading mental health institutions across Canada to make a new blood-testing system broadly available to Clozaril patients. Furthermore, through "Vascepa", the Company expects a blockbuster potential, which could generate the revue of CAD 275-325 million with an Adjusted EBITDA ranging between CAD 110-130 million by FY2025. Therefore, based on the above rationale and valuation, we have given a "Speculative Buy" rating at the closing price of CAD 16.51 January 15, 2021. We have considered Hamilton Thorne Ltd, Knight Therapeutics Inc, etc. as the peer group for the comparison.

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.