PRO Real Estate Investment Trust

PRO Real Estate Investment Trust (TSX: PRV.Un) is an unincorporated, open-ended real estate investment trust company, which has a diversified portfolio of 92 commercial properties across Canada and have more than 4.5 million square feet of gross leasable area. 

The Board of Directors declared a cash distribution of CAD 0.0375, for the month of October 2020, payable on November 16, 2020.

Investment Rationale:

• Robust Rent Collection: The business reported solid rent collection from August 2020 to October 2020, which indicates high-quality tenants coupled with solid operational fundamentals. The company reported 99.6% rent collection for the month of September 2020 and October 2020, which is impressive amidst the ongoing economic cycle.

Recent Rent-collection trend (Source: Company Reports)

• Diversified portfolio to support operations: The company caters to several tenant groups like Industrial tenants, Office-tenants, Retail Tenants and mixed-use commercial tenants etc. In the recent past, the company witnessed pressure from retail and industrial segments, while reported stable performance from mixed-use commercial tenants. As the company caters to a wider clientele base, the risk related to the bad debt declines due to the operational diversity.
• An Income Play: The group has a track record of dividend payment. The Board of Directors declared a cash distribution of CAD 0.0375, for the month of October 2020, payable on November 16, 2020. At the last traded price, the stock was offering a dividend yield of ~9.32%, which is lucrative considering the current interest rate environment.

Q3FY20 Financial Highlights:

• The company impresses with its Q2FY20 financial performance, wherein, the company posted higher property revenue of CAD 17.212 million, as compared to CAD 13.561 million in the previous corresponding period (pcp), supported by incremental revenues from property acquisitions.
• Net operating income stood at CAD 9.773 million, reflecting a growth of 15.7% on y-o-y basis, driven by the favorable impact of property acquisitions.
• Total assets stood higher at CAD 646.321 million, as compared to CAD 524.217 million in Q2FY19.

Financial Highlights (Source: Company Reports)

Risk: The group is exposed to counterparty risk and might face a delay or default in rent collection.

Stock Recommendation: The stock of PRV.UN appreciated ~21% in the last six months. The company has a resilient business model and reported impressive rent collection for the past three months. The focuses on the retail portfolio, which mainly comprised of community strip centers offering essential services and products. AFFO payout ratio stood impressive at 96.3% for the first half of FY20 Furthermore, the stock of PRV.UN offering an attractive dividend yield of 9.32%, which is lucrative. On the valuation front, the stock is available at P/E multiple of 9.3x on the next twelve months (NTM) basis, as compared to the industry median (Residential & Commercial REITs) of 15.9x. Hence, considering the business model, positive impact from acquisition, valuations and recent price movements, we recommend a ‘Speculative Buy’ on the stock at the closing market price of CAD 4.83 on October 27, 2020.

PRV.UN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Precision Drilling Corporation

Precision Drilling Corporation (TSX: PD) is Canada's significant player in contract drilling which has expanded itself into the United States with the purchase of Grey Wolf and in the Middle East region, with more than 250 land rigs. The company also offers completions, workover, maintenance, and abandonment services.

Investment rationales

• Focusing on Debt Reduction: In 3Q 2020, the company generated CAD 42 million of cash provided by operations and CAD 6 million through divestment of non-core assets. The company is determined to bring down its debts by CAD 700 million until 2022. Since 2018, the group has reduced debt levels by over CAD 425 million.

Source: Company

• Preserving cash is the top priority: In the current situation, when things have started improving, preserving cash in on top of the mind of the company’s management. Presently the group has a strong liquidity position of nearly CAD 900 million. The group reduced its cash spending by almost CAD 150 million for this they decreased their capital spending in 2020 to CAD 48 million, down 50%.

Source: Company

• Focus on cost reduction: The company is working aggressively on cost management. The group is targeting to generate a cost saving of CAD 150 million in 2020, which is CAD 50 million higher from the previous guidance. 

Financial overview of 3Q 2020

Source: Company

• The company showcased the revenue of CAD 165 million in 3Q 2020, down 56% compared to 3Q 2019. Due to the global economic slowdown, the company witnessed lower activities across all the operating segments.
• The group reported a net loss of CAD 28 million compared to a net loss of CAD 4 million in 3Q 2019.
• In 3Q 2020 the company managed to generate cash of CAD 42 million and CAD 27 million of funds from operations.
• In the same quarter, the company incurred a capex of CAD 3 million, a decrease of CAD 21 million over 3Q 2019.

Risks associated to investment

The energy industry continues to have a challenging outlook as the COVID-19 pandemic has resulted in significant global oil supply imbalances and near-term crude oil price volatility. There are many risks involved with the company which can create a massive impact on the operations and financial health, such as fluctuations in the level of oil and natural gas exploration and development activities, changes in drilling and well-servicing technology, the impact of weather and seasonal conditions on operations and facilities, etc.

Valuation Methodology (Illustrative): Price to Cash Flow

All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

In the reduced-activity environment, the group’s customers remain focused on operational efficiencies. The group anticipate this will accelerate the industry’s transition towards service providers with the highest performing assets and competitive digital technology offerings. Through the technological digital apps, which is turning out to be a differentiator, the company seeks exceptional results-driving strong customer interest. Company’s international projects in Kuwait and Saudi Arabia are likely to generate excellent results and cash flows. The company has taken a stance to reduce debts and preserve their cash by decreasing the rate of capex amount. Further, the company expects to generate positive cashflow in the remaining quarters of 2020.

Based on the rationales discussed above and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 1.00 on October 27, 2020. We have considered industry (energy) median multiple as proxy to target multiple.

PD 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.