High Liner Foods Incorporated

Improved Supply Chain Efficiencies and Stable Balance Sheet: High Liner Foods Incorporated (TSX: HLF) is a Canadian company which is mainly engaged in the processing and marketing of prepared and packaged frozen seafood products. As on 28 July 2020, the market capitalization of the company stood at ~CAD 186.61 million.

Quarterly Performance (For the Period Ended 28 March 2020): During the thirteen weeks ended 28 March 2020, the company reported significant progress and momentum in its business activities. During the quarter, the company witnessed higher sales volume as compared to the first quarter of 2019 prior to the net unfavorable impact of COVID-19 starting mid-March but sales decreased by USD 8.8 million to USD 268.6 million compared to USD 277.4 million. In the same time span, gross profit increased by USD 2.7 million to USD 58.8 million and adjusted EBITDA increased by 14.9%, to USD 30.7 million. The increase in gross profit and adjusted EBITDA reflects favorable changes in product mix and improved supply chain efficiencies related to the critical initiatives completed in Fiscal 2019.

Financial Highlights (Source: Company Reports)

Outlook: Despite the strength in High Liner Foods' retail business, the Company anticipates that the declines in the foodservice side of its business may limit its ability to deliver year-over-year EBITDA growth. The company is confident in its liquidity position as a result of its prudent cash management and early refinancing of debt.

Key Risks: The company is exposed to various risks and uncertainties, including the timely identification of events that could lead to a product recall; volatility in the exchange rate; competitive developments including increases in overseas seafood production; availability and price of seafood raw materials and finished goods and the impact of geopolitical events.

Stock Recommendation: The Company does not have any impending debt maturities and seems to be well-positioned to navigate through the current challenges including economic uncertainty and fluctuating customer demand. The stock of HLF gave a negative return of 12.16% and 6.67% in the past three months and one month, respectively. As per TSX, the stock of HLF is trading close to its 52-weeks’ low of CAD 5.20, proffering a decent opportunity for accumulation. On a TTM (Trailing Twelve Months) basis, the stock of HLF is trading at an EV/Sales multiple of 0.6x, lower than the industry median (Consumer Non-Cyclicals) of 1.6x and thus seems undervalued. Considering the current trading levels, liquidity position and stable balance sheet, decent financial performance and returns, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 5.60, down by 1.3575% on 29 July 2020.

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

Enerplus Corporation

Decent Liquidity Levels and Positive Long-term Outlook: Enerplus Corporation (TSX: ERF) produces and develops crude oil and natural gas assets in Canada and the United States. As on 29 July 2020, the market capitalization of the company stood at ~CAD 763.33 million.

Quarterly Performance (For the Period ended 31 March 2020): During the first quarter of 2020, the company reported production of 98,209 BOE per day and maintained low financial leverage. During the quarter, the company reported cash flow from operating activities of CAD 122.7 million and adjusted funds flow of CAD 113.2 million. First-quarter net income stood at CAD 2.9 million and adjusted net income was CAD 21.1 million. ERF retains decent liquidity levels with a cash balance of CAD 142 million and reported net debt to adjusted funds flow ratio of 0.8 times. It reported an advantaged position for future capital deployment with 27 net drilled uncompleted wells in inventory in North Dakota.

Average Daily Production (Source: Company Reports)

Outlook: The company has taken proactive steps to preserve shareholder value because of the significant decline in crude oil prices. It has also reduced its capital budget by 45% to CAD 300 million and lowered its cost structure through workflow improvements. ERF expects its Marcellus production to average ~185 to 200 MMcf per day through the remaining 2020.

Key Risks: Investment in ERF is subject to various risks and uncertainties, including continued instability in global economic and market environment from COVID-19; low commodity prices environment or further decline and volatility in commodity prices; changes in realized prices of the company’s products; and changes in the demand for the supply of products.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The company retains significant operational flexibility to reduce production levels to protect against selling oil at negative margins and preserve shareholder value. The company has scheduled to release its earnings for the second quarter on 7 August 2020. As per TSX, the stock of ERF is trading close to its 52-weeks’ low of CAD 1.62, proffering a decent opportunity to investors. The stock of ERF gave a return of 8.97% in the past three months. We have valued the stock using an EV/Sales multiple based illustrative relative valuation and have arrived at a target upside of lower double-digit (in percentage terms). Considering the current trading levels, decent returns in the past one month, operational performance and positive long term outlook, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 3.43, up by 0.8824% on 29 July 2020.

ERF Daily Technical Chart (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.