Slate Office REIT

Slate Office REIT (TSX: SOT.UN) is a Canada based open-ended real estate investment trust. The company focuses on acquiring, holding, developing, maintaining, improving, leasing, managing or otherwise dealing with office properties in Canada.

Key Updates:

• Reduction of Debt: The company reduced its debt to CAD 972.604 million, significantly lower than CAD 1,001.947 million in FY19. This helps company to lower down its interest expenses CAD 42.497 million against CAD 48.988 million in FY19 and bolster profitability.

• An income Play: The company has a solid history of consistent dividend payment, backed up by stable cash flows. Moreover, the stock of SOT carries a dividend yield of ~9.5% on an annualized basis, which is significantly higher than the TSX composite of ~3.31% on an annualized basis. This would attract several investors group looking for consistent income stream.

• Improved Liquidity: The company reported improved liquidity of CAD 54.765 million in FY20, compared to CAD 37.238 million in FY19. The current liquidity level includes a cash balance of CAD 8.520 million and undrawn revolving facilities of CAD 46.245 million, which seems to be sufficient to meet its business objectives and commitments.               

Source: Company Reports

FY20 Financial Highlights:

• UN announced its full-year result, wherein the company posted its rental revenue at CAD 183.586 million, reflecting a decline of 14.8% on y-o-y basis. The decline was primarily due to a significantly lower income from the Canada segment (CAD 146.513 million versus CAD 176.411 million in FY19).
• Net operating income stood at CAD 91.564 million, lower than CAD 103.036 million in FY19. The decline was primarily due to lower revenue, partially offset by lower property operating expenses (CAD 97.646 million versus CAD 114.823 million in FY19).
• Adjusted EBITDA was recorded at CAD 87.146 million, as compared to CAD 98.943 million in FY19.
• The company reported a net income of CAD 13.648 million, lower than CAD 62.441 million in FY19.

Source: Company Filing

Risks: Due to the current economic slowdown, the group reported a slide in its occupancy rate at 84.2% in Q4FY20, lower from 85.4% in Q3FY20. Continuation of such trend would affect the group’s revenue.

Valuation Methodology (Illustrative): EV to EBITDA

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

From April 2020 to December 2020, the group witnessed an encouraging rent collection within the range of 96% to 98%, despite the ongoing challenges led by COVID-19 pandemic. Also, despite a relatively lower occupancy, the company reported cash from operations of CAD 46.450 million in FY20, slightly lower than CAD 49.296 million in FY19, which reflects company is prudently managing its costs to bolster cash position. The stock of SOT has closed above the long terms support level of 200-day and 150-days simple moving averages (SMAs), indicating a bullish price trend. Moreover, the stock is offering a lucrative dividend yield amid a low interest rate environment. We have valued the stock using the EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Inovalis Real Estate Investment Trust, Dream Industrial Real Estate Investment Trust etc. Considering the aforesaid facts, current price movements, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 4.18 on February 26, 2021.

SOT.UN Daily Technical Chart (as on February 26^th, 2021).Source: Refinitiv (Thomson Reuters) 

The Valens Company Inc.

The Valens Company Inc. (TSX: VLNS) is a developer and manufacturer of cannabinoid-based products. The company's extraction methods are CO2, ethanol, hydrocarbon, solvent-less, and terpene extraction. Its products are tinctures, capsules, beverages, and vape cartridges, among others.

Key Updates:

• FY21 Operational Priorities: The company is seeking to make its mark across the US markets and other international markets and would look for strategic partnerships and acquisitions with leaders in their respective markets. After gaining strong traction within the vaping segment, the group would focus on attaining leadership positions within the edibles, concentrates, beverages and 3.0 products, which is promising. The recreational market within Canada has witnessed tremendous traction in the recent past, while VLNS would rely on new launches in order to accelerate its existing market share within the health and wellness market.

• New Manufacturing Facility to cater to growing demand: Recently, the group submitted a site evidence package to Health Canada under its existing micro-processing license application for the Company's third facility in the Greater Toronto Area. The above facility is in the final stages of construction and is expected to provide 30,000 square feet of additional capacity. The group would utilize the facility for the formulation, co-packing, and manufacturing of cannabis-infused beverages and other customized 2.0 and 3.0 products by using its SōRSE by Valens emulsion technology.

FY20 Financial Highlights for the period ended November 30, 2020.

• VLNS announced its full-year results, wherein the company posted net revenue of CAD 83.778 million, significantly higher than CAD 58.106 million in FY19. The increase was driven by significantly higher product sales.

Revenue Breakdown (Source: Company Reports)

• The group reported a gross profit of CAD 25.724 million, lower than CAD 41.351 million in FY19.
• Adjusted EBITDA stood lower at CAD 14.139 million, as compared to CAD 27.471 million a year ago. The decline was primarily attributed to the Company's previously announced strategic inventory realignment coupled with a higher operating expense due to the company’s strategy to scale its operations and build out its manufacturing platform.
• Net loss widened to CAD 20.682 million, from a loss of CAD 6.536 million in FY19.

FY20 Income Statement Highlights (Source: Company Reports)

Risks: Change in consumer preferences and entry of new products might affect the company’s overall volume. Moreover, an increase in the raw material prices might take a toll on the company’s margins as well.

Valuation Methodology (Illustrative): EV to Sales based approach.

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

The acquisition of LYF Food Technologies Inc. in the recent past is likely to enhance the company’s presence within the edibles market, which is impressive. Moreover, the company would increase its custom manufacturing and white label agreements and would continue to enhance its partnership with its existing customers. In the recent past, the company achieved EU GMP Certification and broadened its international shipments, including increased sell-through in existing international markets such as Australia, and globally particularly Europe, which is expected to support the company’s future operations. We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Auxly Cannabis Group Inc, Fire & Flower Holdings Corp etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 1.73 on February 26, 2021.

VLNS Daily Technical Chart (as on February 26^th, 2021).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.