High Liner Foods Incorporated

High Liner Foods Incorporated (TSX: HLF) is engaged in processing and marketing of a wide range of frozen seafood, from breaded and battered items to seafood entrées. The company has several brands namely, High Liner Culinary, Mirabel, FPI, Viking, American Pride, High Liner, Fisher Boy, Sea Cuisine and others.

Q1FY20 Income Statement Highlights: HLF announced its quarterly results, wherein the company reported revenue of USD 268.59 million, slightly lower than USD 277.42 million in pcp. The decline was primarily attributable to lower sales volume on account of unfavorable changes in sales mix. Further, the company witnessed a significant reduction in the foodservice segment, due to the closure of foodservice business on account of COVID 19. The company reported a higher Gross profit of USD 58.77 million compared to USD 56.07 million in the previous corresponding period (pcp) due to a significantly lower cost of sales. However, results from operating activities dipped to USD 24.89 million against USD 26.48 million in Q1FY20 as the previous corresponding quarter’s number included an income from business acquisition, integration and other amounting to USD 7.25 million. Distribution expenses and selling, general & administrative expenses stood lower than Q1FY20. The company reported a net income of USD 14.22 million as compared to USD 14.76 million, due to a decline in results from operating activities, partially supported by lower finance costs. The company ended the quarter with a cash balance of USD 14.99 million, while total assets stood at USD 791.88 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: Foodservice segment constitutes a major portion of the total revenue. The occurrence of the second wave of COVID 19 could spoil the performance of the foodservice segment, which would dampen the overall performance of the company.

Stock Recommendation: The stock of HLF corrected ~35% so far this year on account of weaker investors sentiment. Despite a lower income, the operating performance of the company was impressive as the Management reported operational efficiencies through disciplined cost management. In the recent past, the company witnessed a solid demand from retail customers, and the company has successfully catered to the growing demands through redirecting resources, inventory and production capacity across its integrated North American operations. Further, the company is seeking collaboration with hospitality customers to boost its takeout and delivery options. Demand from foodservice segment declined recently on account of containment measures in place; however, a pickup in demand from the segment is expected as stated are easing restrictions and allowing businesses such as restaurants to resume operations. The company has access to USD 150 million under the credit facility, which should cater to the near-term capital requirements. The stock of HLF corrected by ~21% in the last one month and is trading at a significantly lower valuation compared to the industry median. The HLF stock is available at an EV to Sales of 0.5x on NTM basis, as compared to industry (Food & Tobacco) median of 1.4x. Hence, considering the aforementioned facts and risk scenario, we recommend a ‘Speculative Buy’ on the stock at the closing price of CAD 5.37 on July 08, 2020.

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

Hamilton Thorne Ltd.

Hamilton Thorne Ltd (TSXV: HTL) is engaged in providing precision instruments, consumables, software and services that reduce cost, increase efficiency & productivity, improve results and enable breakthroughs in Assisted Reproductive Technologies (ART) and developmental biology research markets. The company has several brands under its hood, namely, Hamilton Thorne, Gynemed and Embryotech Laboratories.

Q1FY20 Financial Highlights: HTL impresses with its top-line and bottom-line due to strong organic growth coupled with strong momentum from the toxicology testing equipment segment. The Group reported sales of USD 10.4 million, reflecting an increase of 36% over the previous corresponding quarter. The growth was aided by 11% organic growth. The quarter witnessed a higher cell biology/research sale, primarily due to the contribution from the Planer acquisition, boosted by strong toxicology testing equipment sales, while slightly lower sales in animal breeding segment remained a drag. Gross profit stood at USD 5.22 million, as compared to USD 3.97 million, thanks to improved sales figure. The company reported a dip in gross profit margin by 1.90% primarily due to product mix change and an increase in sales of third-party capital equipment associated with a large laboratory setup in Europe. EBITDA grew to USD 1.82 million, as compared to USD 1.50 million, a year ago. The company reported net income of USD 0.14 million as compared to a loss of USD 0.56 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: The next wave of COVID-19 outbreak could create difficulties for the group in the short-term to mid-term period. The company is exposed to foreign exchange risks, a dip in US Dollar values against the basket of majors could weigh on the group's topline and profitability.

Stock Recommendation: The stock of HTL was resilient in the recent past and appreciated ~20% and ~13% in the last six-months and nine months, respectively, amidst a major crash in the global equity markets. Notably, the stock is quoting above its 200-days simple moving average of CAD 1.11, indicating a bullish trend. The company has a strong balance sheet with quite manageable debt proportion in the total capital structure. The Long-term debt to total capital ratio stood at 17.8% at the end of Q1FY20, with an interest coverage ratio of ~ 3.6x.  In the recent past, the company witnessed higher demand from Europe, and the US has encouraged IVF clinics to resume operations with enhanced safety measures. Moreover, the group's China business started showing the sign of recovery, which was significantly impacted in Q1FY20 and flattering COVID-19 cases across the world is expected to bring demand for the group's offerings back to the normal by the end of the third quarter of FY20.  The quarter witnessed substantially demand pick-up from the human clinical market, primarily driven by the contribution from the Planer acquisition, and we expect the momentum to continue in the coming days. On the valuation front, the stock of HTL is available at Forward EV/Sales multiple of 2.9x, as compared to the industry (Health care Equipment & Supplies) median 4.6x. Hence, considering the aforementioned factors, current price movements and risk scenario, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 1.25 on July 8, 2020.

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

Disclaimer

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