Pizza Pizza Royalty Corp

Pizza Pizza Royalty Corp. (TSX: PZA) operates in a quick-service restaurant (QSR) business and offers pizzas and other food items to its consumers. The company derives its royalty income from more than 700 restaurant outlets.

The company declared a monthly cash dividend of CAD 0.05 per common share, payable on October 15, 2020.

Q2FY20 Financial Highlights: Pizza Pizza Royalty declared its quarterly results, wherein the company reported total system sales of CAD 113.506, declined from CAD 134.250 million in the previous corresponding period (pcp). The decline was majorly attributed to 16.3% lower same-store sales due to the temporary closure of stores coupled with lower traffic in the stores due to social-distancing mandate. The company witnessed a 15.5% on y-o-y fall in the royalty income to CAD 7.452 million, due to a decline in the operating stores. During the quarter, the group reported a decrease in the total network by store closure. The group recorded marginally lower interest costs and a higher administrative expense during the quarter. Adjusted earnings available for distribution stood lower at CAD 7.00 million as compared to CAD 8.272 million, a year ago. Adjusted earnings from operations were reported at CAD 5.834 million, stood lower than CAD 6.850 million, a year ago. During the quarter, the group opened one traditional restaurant, and one non-traditional Pizza Pizza location while five traditional and eight non-traditional Pizza Pizza restaurants were permanently closed. Additionally, PZA opened one traditional Pizza 73 restaurant and closed one non-traditional Pizza store.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The industry might witness setbacks from lower consumer demand, due to a decline in the consumer expenditure and a change in consumer taste and preference.

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 PZA corrected ~11% so far this year. Despite the current economic downturn, where most of the businesses are cutting dividend payments, PZA has continuously distributed dividend to its shareholders, which is encouraging from an income investor’s point of view. At the last traded price, the stock was offering a lucrative dividend yield of ~6.904%. The company witnessed a major setback due to the recent closure of the stores and reported a declined performance. The company reported an improved sales volume for the month of July, which is encouraging. July comparable sales have rebounded quickly, up 20 percentage points from April sales. The group’s traditional restaurants posted solid results in the latter part of the quarter and into July, and account for approximately 90% of Royalty Pool System Sales. The group’s delivery and pickup sales, particularly through digital channels, grew significantly throughout the second quarter, nearly offsetting a major decrease in our dine-in sales. The company derives a major chunk of its revenue via delivery segment, and the company has relaunched its digital ordering apps, which is likely to be the major sales-driver, in the future. We have valued the stock using the P/E based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered industry (Hotel & Entertainment Services) median on NTM basis. Hence, considering the aforesaid facts and current price movement, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 8.69 on October 08, 2020.

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

Seven Generations Energy Ltd. 

Seven Generations Energy Ltd. (TSX: VII) is an independent energy company engaged in the acquisition, development, and optimization of high-quality, tight rock, natural gas resource plays. The company employs long-reach and horizontal drilling to produce resources of natural gas, condensate, and natural gas liquids.

Q2FY20 Financial Highlights: Seven Generations Energy Ltd. declared its quarterly results, wherein the revenue was reported at CAD 409.8 million as compared to CAD 687.3 million in the previous corresponding quarter (pcp). The significant decline was primarily attributable to a lower performance from the Condensate segment due to falling realized price combined with a decline in the sales volume. Realization of condensate stood at CAD 26.59 /bbl, considerably lower from CAD 71.91/ bbl in Q2FY19. The company reported a loss before income tax at CAD 177.6 million, against a profit of CAD 284.6 million in the pcp. The quarter was marked by slightly higher transportation, processing and other costs and product purchases, which was partially offset by lower operating expenses, depletion and depreciation expenses. The company reported a net loss of CAD 116.9 million, as compared to a net income of CAD 295.3 million in Q2FY19. Amidst a sluggish performance, the company posted free cash flow of CAD 69.4 million, higher than CAD 44.2 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Company’s business is exposed to natural gas prices, and the demand is directly correlated with the demand from the manufacturing and industrial sectors. Further breakout of the novel virus would hamper the demand for oil and natural gas, thereby impacting the group’s performance.

Valuation Methodology: P/CF Based (Illustrative)

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

Stock Recommendation: The stock of VII tumbled ~52% so far this year, due to a drastic fall in the crude oil and natural price in the international market. The company is known as one of the lowest supply-cost, unconventional liquids-rich natural gas developer in North America. The company uses a combination of resource selection with innovation, technology and efficiency to retain its competitive advantage. Amidst a demand destruction scenario, the company reported a stable sales volume of natural gas of 467.9 MMcf/day, as compared to 489.6 MMcf/day in Q2FY19, which is encouraging. The company has lowered its FY20 capital expenditure program and suspended its share buyback program to ensure sufficient liquidity. The company has available funding of CAD 1.1 billion, primarily consisting of undrawn credit capacity that matures at the end of 2024. Also, the company increased its liquids and foreign exchange hedges for the remainder of 2020. With the economic activities returning on track, we believe the overall price realization is likely to improve supported by improvement in demand. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a lower double-digit upside potential (in % terms). For the said purpose, we have considered peers like Nuvista Energy Ltd, Crescent Point Energy Corp, and Whitecap Resources Inc etc. Hence, considering the aforesaid facts, current price movement, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 4.08 on October 8, 2020.

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

Disclaimer

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