PRO Real Estate Investment Trust

PRO Real Estate Investment Trust (TSX: PRV.UN) is a Canada-based open-ended real estate investment trust (REIT), with four classifications of investment properties: Retail, Office, Commercial Mixed Use and Industrial. The Company's portfolio consists of approximately 93 properties providing a portfolio of over 4.5 million square feet of commercial gross leasable area.

Key highlights

• An Income Play: The group has a decent track record of dividend payment. On November 16, 2020, the company paid a monthly dividend of CAD0.0375 per common share. At the last traded price, the stock was offering a dividend yield of 7.8%, which is lucrative considering the low interest rate environment.

• Well-diversified and Strong Tenant Base: In Q3 2020, the occupancy rate remained stable at 98.1%, in line with the previous corresponding period. The company is generating 86% of its total portfolio base rent from national and government tenants, while the top ten largest tenants accounted for approximately 36.7% of the base rent.

Source: Company

• Robust Rent collection: The group reported solid rent collection from July 2020 to Oct 2020, which indicates high-quality tenants coupled with solid operational fundamentals. In September 2020 and October 2020, the company reported 99.6% rent collection, which is impressive amidst the ongoing economic cycle.

Source: Company 

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the company reported the Property revenue of CAD 17.3 million, increased CAD 4.1 million, or 30.7%, compared to CAD 13.2 million in the previous corresponding period, primarily due to incremental revenues from property acquisitions.
• Net operating income reported by the company in Q3 2020, stood at CAD 10.39 million, an increase of CAD 1.87 million as against CAD 8.52 million in the previous corresponding period, due to the favourable impact of property acquisition making higher revenues.

Source: Company

• The company reported a net loss of CAD 0.7 million in Q3 2020 as against a net profit of CAD 6.9 million in Q3 2019, due to high-interest cost and loss on fair value adjustment under investment properties.

Risks associated with investment

The revenue and operating results of the Company depend significantly on the occupancy levels and rent collection. Owing to COVID-19 pandemic, the company might face a delay in rent collection. 

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock recommendation

The company has a resilient business model and reported impressive rent collection at the rate of 99.2% in Q3 2020, and 99.6% in October, which is the first month of the upcoming Q4 2020. Along with this, the company also have well-diversified and Strong Tenant Base. In Q3 2020, the occupancy rate remained stable at 98.1% helped the company in generating 86% of their total portfolio base rent from national and government tenants. At the last traded price, the stock was offering a dividend yield of 7.8%, which is lucrative for the income seeking investors considering the current interest rate environment.

Therefore, based on the above rationale and valuation, we have given a ‘Speculative Buy’ rating at the closing price of CAD 5.43.  We have considered Inovalis Real Estate Investment Trust, Plaza Retail REIT, True North Commercial REIT etc. as the peer group for the comparison.

One year daily technical chart. Source: Refinitiv (Thomson Reuters)

Frontera Energy Corporation

Frontera Energy Corporation (TSX: FEC) is a Canadian-based exploration and production company. The group’s operations include exploration, development, and production of crude oil and natural gas reserves in South America. The majority of its production is crude oil, with natural gas accounting for a much smaller portion of the company's revenue. 

Key Update:

On November 17, 2020, the company made an agreement with Cenit Transporte y Logística de Hidrocarburos S.A.S. and Oleoducto Bicentenario de Colombia S.A.S, wherein they would jointly file a petition for a binding settlement which, would be approved by Colombian court in order to resolve all the disputes pending related to the Bicentenario Pipeline and the Caño Limón – Coveñas Pipeline.

Key Highlights:

• Costs Synergies with Prudent Capital Management: The company has reduced its expenses in the recent past, in order to combat the current challenging operating environment and lower oil prices. Transportation costs and production costs have remained below the previous quarters, which is a key positive. Furthermore, to retain the company’s liquidity levels, the management has lowered its capital investments.                                            

Operational Metrics (Source: Company Presentations)

• Impressive Outlook: Despite a sluggish first half production levels, the company expects its second quarter production within 40,000 boe/d to 43,000 boe/day, while FY20 production is estimated at 46,000 boe/day to 48,000 boe/day. The company expects its second-half production costs at USD 8.0 to USD 9.0/ boe, improved from USD 10.48/boe in 9MFY20, which augurs well to support the company’s margins.

FY20 Guidance (Source: Company Reports)

Q3FY20 Financial Highlights:

• FEC announced its quarterly results, wherein the company posted revenue of USD 152.760 million, as compared USD 277.676 million in the previous corresponding period (pcp). The decline was primarily attributable to lower net realization price of USD 36.31/boe, as compared to USD 53.21/boe in Q3FY19.
• Loss from operations stood lower at USD 12.765 million, as compared to USD 18.897 million, supported by lower operating costs, Impairment, exploration expenses and other costs and depreciation expenses.
• Net loss widened to USD 92.642 million, as compared to USD 48.656 million in pcp, due to a higher other loss and inclusion of reclassification of currency translation adjustments amounting USD 23.956 million.
• Net production and sales volumes stood relatively lower at 40,215 boe/day and 40,445 boe/day, respectively as compared to 64,271 boe/day and 54,378 boe/day, in the previous corresponding period.
• Cash and cash equivalents were recorded at USD 259.980 million, while total assets stood at USD 1,865.465 million.                     

Source: Company Reports                           

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The group’s performance is correlated to prices of oil and gas. Any volatility in oil and gas prices would affect the group’s performance. 

Valuation Methodology (Illustrative): EV to EBITDA

Stock Recommendation: Due to a slump in the oil prices, the stock of FEC corrected ~74% so far this year. During 9MFY20, Capital expenditures stood at USD 83.232 million, as compared to USD 213.467 million a year ago, as the Company focuses on lower capital budget due to prevailing lower oil prices, which is likely to support the liquidity level. Furthermore, the company do not have any debt maturities until FY23, which a key positive for liquidity.

We have valued the stock using 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 Parex Resources Inc, Tourmaline Oil Corp and Petrus Resources Ltd etc. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ on the stock at the current closing price of CAD 2.56 on November 19, 2020.

FEC 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.