Spark Power Group

Spark Power Group (TSX: SPG) is a leading independent provider of end-to-end electrical contracting, operations and maintenance services, and energy sustainability solutions to the industrial, commercial, utility, and renewable asset markets in North America. 

Q2FY20 Financial Highlights: SPG impresses with its second-quarter results, wherein the company posted revenue of CAD 46.340 million, up 4.7% over Q2FY19, underpinned by an improved performance from the US segment, while a slide in the Canada segment remained a drag. During the quarter, the company recorded a higher gross profit CAD at 15.981 million compared to CAD 14.587 million and gross margin improved to 34.5% from 32.9% in Q2FY19, respectively. Income from operation reported a jump of 60.8% on y-o-y basis at CAD 4.366 million. The company reported improved performance, amidst the ongoing jolt across the economy, aided by the company’s strategy of focusing on the integration of core systems, sales processes, supply chain combined with brand integration. Moreover, unlike its competitors, the company executed several large-scale projects during the quarter, which enhanced the overall operations. Adjusted EBITDA soared 66% on y-o-y basis to CAD 9.112 million, driven by a CAD 8.0 million of subsidies under the Canada Emergency Wage Subsidy ("CEWS") program. The company reported net income of CAD 1.232 million, as compared to a net loss of CAD 2.141 million in the previous corresponding quarter.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: If the second wave of the novel virus forced the state governments to impose further restrictions, the business might witness a halt in its operational activities, which would further dampen the performance.

Stock recommendation: The stock of SPG reported a decent gain of ~25% and ~43% in the last nine-months and one year, respectively. The group reported solid financial performance in the second quarter of 2020, despite the significant effect of the pandemic on the economy. Also, a significantly higher free cash flow yield of the company reflects that the company is generating enough cash to easily satisfy its debt and other obligations. Also, the company is boasting a decent ROE of 9.1%, relatively better than the industry average. Going forward, the management would focus on areas like, liquidity, and maintaining service to customers, which are key positives and are likely to enhance the overall performance. The company has managed its operations in an efficient manner and would prioritize on balancing organic growth and pursuing acquisitions in the pipeline. With the re-opening of the economy, we expect a revival in the company’s order book in the coming days. On the valuation front, the stock of SPG is available at EV/EBITDA 5.1x on next twelve months basis (NTM) basis, significantly lower than industry (Industrials) average of 11.4x. Hence, considering the operating performance, current trading levels, we recommend a ‘Speculative Buy’ on the stock at the closing price of CAD 1.50 as on October 15, 2020.

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

Exchange Income Corporation

Exchange Income Corporation (TSX: EIF) is a diversified, acquisition-oriented corporation focused on opportunities in aerospace and aviation services and equipment, and manufacturing activities. The company operates through two major segments, namely, Aerospace & Aviation and Manufacturing.

The company would disclose its third-quarter results on November 13, 2020.

Q2FY20 Financial Highlights: Exchange Income declared its quarterly results, wherein the company reported revenue of CAD 243.657 million, as compared to CAD 325.907 million in the previous corresponding period (pcp). The decrease was primarily attributable to the sluggish scenario of the Aerospace sector across the Globe, due to restriction imposed by the Government, partially offset by an improved performance from the manufacturing segment. Income from the manufacturing segment grew 19% from Q2FY19, underpinned by the positive impact from the acquisitions of AWI and L.V. Control during FY19. The company posted EBITDA of CAD 62.075 million, down from CAD 87.237 million, primarily driven by a weak passenger volume due to travel ban. Net earnings of the company stood at CAD 2.630 million, plunged from CAD 21.875 million in pcp. The company reported free cash flow at CAD 42.268 million against CAD 65.729 million, a year ago. The company reported capital expenditure of CAD 25.412 million during the second quarter of FY20, lower than CAD 34.533 million in pcp.

Q2FY19 Financial Highlights (Source: Company Reports)

Risks: A major part of the revenue is being derived from the aviation segment, and the recent restrictions imposed on account of the pandemic has caused a tremendous impact on the aviation segment. Continued pain in the aviation sector might hinder the group’s performance.

Valuation Methodology: EV to Sales Based (Illustrative)

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

Stock Recommendation: The EIF stock corrected ~31% so far this year, on account of weak sectoral scenario. However, the business witnessed higher passenger growth during the latter part of the second quarter, which is encouraging. The company expects the capacity levels to improve in the coming quarters. Amidst the major slowdown, EIF’s manufacturing segment reported improved performance in the recent past, which is a key positive. Going forward, the company will remain focus on the work in progress and on proper execution of the business strategies and plans in order to drive performance. We expect the pressure on the profitability is expected to continue in the coming days on account of higher input costs. However, the increase in aviation capacity along with improved dynamics from the manufacturing segment is likely to drive the operating performance of the company in the coming quarters. Further, the group continued to distribute dividend despite challenging operating environment, which is encouraging from an income investor’s standpoint. At the last traded price, the stock was offering a dividend yield of ~7.37%. We have valued the stock using 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 Cargojet Inc, Chorus Aviation Inc Inc etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 30.94 on October 15, 2020.

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

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