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.

Investment Rationale:

• Improved Liquidity: On a year-to-date basis, the company generated higher cash from operations at CAD 17.9 million, as compared to CAD 12.5 million a year ago due to lower working capital. Meanwhile, the company has an unutilized balance of CAD 42.4 million as a revolving credit facility. We believe the company’s liquidity seems enough to surpass the current challenging environment.
• Income Play: KBL shares are offering a dividend yield of 4.0% amid lower interest rate environment, with a track record of consistent dividend payment. The company’s dividend yield is surpassing the TSX Composite Dividend Yield of 3.57%. Moreover, despite a slowdown in operations, the group has maintained stable dividend payout (at CAD 0.300 per share), while most of the businesses are suspending or cutting dividend payment. Further, the management has declared a dividend of CAD 10.00 per common share, payable on October 31, 2020.

Dividend Payment Over Past 10-Year (as on October 19, 2020,). Source: Refinitiv (Thomson Reuters)

Financial Highlights for Q2FY20:

• Revenue stood at CAD 37.520 million, reflecting a decline of 91.7% on y-o-y basis. The decline in the overall performance was due to the travel restriction across Canada and the UK, combined with a significantly lower occupancy rate across the hospitality sector.
• EBITDA stood at CAD 10.055 million, lower than CAD 12.739 million in the previous corresponding period (pcp), supported by lower input costs coupled with wage subsidies from the Federal government.
• Net Earnings stood significantly lower at CAD 1,613 million, as compared to CAD 3,547 million in Q2FY19.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: A significant part of the revenue comes from the hospitality segment, and continuation of the travel ban is likely to weigh on the cash generation capacity of the business.

Valuation Methodology (Illustrative): EV to EBITDA based

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

Stock Recommendation: The stock of KBL corrected ~30% so far this year. The company has lowered its long-term debt component, from CAD 62.494 million in FY19 to CAD 56.416 million at the end of Q2FY20, which reflect financial prudence. 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%. Also, with the easing lockdown restrictions, we expect gradual recovery in the hospitality sector, which would subsequently support the overall performance of the company. Hence considering the above rationale and valuation, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 30 on October 19, 2020.

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

Ag Growth International Inc.

Ag Growth International Inc. (TSX: AFN) is a leading provider of equipment solutions for agriculture bulk commodities including seed, fertilizer, grain, feed and food processing systems. AGI has manufacturing facilities in Canada, the United States, the United Kingdom, Brazil, France, Italy and India, and distributes its product globally.

Recent Highlights:

• The company will disclose its quarterly result on November 12, 2020.
• The Board of Directors paid a quarterly dividend of CAD 0.15 per common share, while annualized cash dividend stood at CAD 0.60 per share.
• Recently, the company reported the collapse of its grain storage bin manufactured by the company located in North Vancouver, BC.

Investment Rationale:

• Robust FY20 Outlook: Despite the recent collapse of grain shortage bin, the company forsee a solid FY20 performance, driven by strong traction from the North American Farm, in Brazil, EMEA, India, AGI Food, and AGI SureTrack. The company further expects an improved EBITDA number for the latter half of FY20.
• Higher Order Backlog: The company reported a 25% higher backlog over Q2FY19 as the company’s order book was least impacted by COVID-19 pandemic. The company’s international market such as Brazil and India, have performed above its expectations, while the company expects to retain the momentum during the second half of FY20.

Q2FY20 Financial Highlights:

• The company reported a lower Q2FY20 sales at CAD 257.938 million, as compared to CAD 291.938 million in the previous corresponding period (pcp). The decrease was primarily attributable to revenue from Canada and the United States, partially supported by an improved sale from the international segment.
• Gross profit declined to CAD 67.349 million, against CAD 82.635 million in Q2FY19, due to lower revenue, partially supported by a decline in cost of goods sold.
• However, the company reported a higher net profit at CAD 14.472 million, against CAD 12.516 million, a year ago supported by a lower income tax and a higher finance income.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Commercial grain handling activity in the United States witnessed several setbacks due to depressed agricultural markets and international trade disputes. Continuation of the above trend would impact the overall performance.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation: The stock of AFN corrected ~41% so far this year. The company expects improved traction across Canada and the USA region, while within the international segment, sales volumes are expected to grow aided by robust demand from Brazil and India. Furthermore, with the gradual revival of farm equipment sales, we expect an improved operating performance in the coming months. The stock bounced back from the year low and generated ~40% return in the last six 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 industry (Food & Tobacco) average on the next twelve months (NTM) basis. Considering the aforesaid facts, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 27.28 on October 19, 2020.

AFN 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.