High Liner Foods Incorporated

High Liner Foods Incorporated (TSX: HLF) is a Canadian company which is mainly engaged in the manufacturing and distribution of prepared and packaged frozen seafood products. The group has presence across U.S., Canada and Mexico under the brand name of high liner, fisher boy, Mirabel, Sea Cuisine and catch etc. and are available in the most grocery and club stores.

Q2FY20 Financial Highlights: HLF declared its quarterly results, wherein the Company posted sales of USD 165.829 million, significantly lower than USD 223.034 million in the previous corresponding period (pcp). Due to a lower sales volume of 49.3 million lbs, against 60.4 million lbs in Q2FY19, the revenue took a hit. The drop in the sales volume was primarily attributable to the closure of the food service industry, which includes restaurant and schools on account of COVID-19. The quarter witnessed an improved performance from the retail segment, which was partially offset by a weaker Canadian dollar. Gross profit, during the quarter, fell to USD 36.733 million, against USD 42.848 million in Q2FY19 due to a decline in the income. On the flip side, the gross profit margin showed an improvement at 22.2% against 19.2% recorded in pcp. Adjusted EBITDA stood marginally lower at USD 17.087 million as compared to USD 17.883 million in pcp. Net income soared to USD 3.382 million from USD 0.946 million recorded a year ago, aided by a drastic fall in the share-based compensation expense, a decline in business acquisition integration and other expense (income), coupled with a decrease in finance costs.

Q2FY20 Income Statement Highlights (Source: Company Reports)

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.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation: Due to a closure of the foodservice industry on account of COVID-19 pandemic, the stock tumbled ~28% in the last one year. Amidst a demand destruction scenario, the business has reported better than expected performance in Q2FY20 underpinned by robust demand from the retail segment and smooth distribution and logistics support, which is commendable. The company has able to maximize its retail sales and witnessed an increased demand for higher-margin value-added products with high case fill rates and the introduction of new products. During the latter half of the quarter, the group witnessed strong traction within the foodservice segment aided by higher customer loyalty, which is impressive. With the gradual re-opening of the food services businesses (especially restaurants), the Management is positive on increasing its sales volume in the coming days. The company reported an improvement in Net Debt to trailing twelve-months Adjusted EBITDA to 3.9x as compared to 4.2x in Q1FY20. The company is confident in its liquidity position as a result of prudent cash management and early refinancing of debt in late 2019. The company does not have any impending debt maturities and will continue to utilize USD 150.0 million working capital credit facility if required. The HLF stock recovered from the lows and gained ~25% in the last three months. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Clearwater Seafoods Inc., Recipe Unlimited Corp etc. Considering the aforesaid facts, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 8.39 on September 14, 2020.

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

K-Bro Linen Inc.

K-Bro Linen Inc. (TSX: KBL) is a Canada based owner and operator of laundry and linen processing facilities and provides a comprehensive range of general linen and operating room linen processing, management and distribution services to healthcare institutions, hotels and other commercial players.

Q2FY20 Financial Highlights: K-Bro declared its quarterly results, wherein the group posted revenue of CAD 37.52 million, reflecting a decline of 91.7% on y-o-y basis. The performance was badly impacted by the travel ban across Canada and the UK, combined with a significantly lower occupancy rate across the hospitality sector. Demand for both business and leisure airline travel reduced considerably across the globe, which impacted the hospitality segment. Wages and benefits expense, utilitiy expense, materials and supplies, repairs and maintenance etc. stood significantly lower than the previous corresponding quarter, which supported the EBITDA. The Company posted EBITDA at CAD 10.055 million as compared to CAD 12.739 million in pcp. EBITDA mar The Company posted net earnings of CAD 1.613 million as compared to CAD 3.547 million in Q2FY19. Cash and cash equivalent, at the end of the quarter, stood at CAD 3.183 million, while total assets were recorded at CAD 330.372 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The business might witness challenges due to a lower occupancy rate across the hospitality sector, which might dampen the overall performance of the company.

Stock Recommendation: The stock corrected ~28% so far this year, due to a travel ban, which caused a demand destruction scenario in the hospitality sector. The company provides laundry and linen processing services to the hospitality and healthcare sectors, which is categorized as 'essentials' and has allowed the business to continue its normal course of operations. The group received assistance for its UK division under Coronavirus Job Retention Scheme (CJRS) which was introduced by the UK government on March 20, 2020, and paid approximately 80% of salaries for employees. The group has executed its strategy within the Toronto and Vancouver markets, and it believes it is well position to enhance its presence within the hospitality segment and continued with improved business prospects. Furthermore, the company took prudent strategies by lowering its FY20 capital investments to CAD 3 million, lowered from earlier projections of CAD 5 million. The group have seen improvements in client activity with April's revenue being the low point and May and June gradually improving. 

During the quarter, healthcare volumes began to return to more typical levels, while hospitality remained below historical levels. Further, the group is deriving approximately 70% of Canadian revenue from the healthcare sector, where the group witnessed a growth in the recent past. The group expects its consolidated adjusted EBITDA margin for the full year to be between 12% and 16%. We expect demand for the group's offerings to improve as the governments across the states are lifting the containment measures. On the valuation front, the KBL stock trades at a lower valuation compared to the industry median. The stock is trading at forward P/CF multiple of 8.6x as compared to the industry (Professional & Commercial Services) median of 13.3x. The company has witnessed an improvement in demand during the second quarter, especially from the healthcare segment, which is encouraging. Demand from the hospitality segment is also improving; however, we believe that traction is likely to remain under pressure in this segment owing to travel ban and social distancing norms. Hence considering the aforesaid facts, we recommend a 'Speculative Buy' on the stock at the closing market price of CAD 30.06 on September 14, 2020.

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

Disclaimer

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