Pollard Banknote Ltd (TSX: PBL) is a Canada-based company primarily involved in the manufacture and sale of lottery and gaming products.

Revenue Mix

Pros

• Offering a lucrative free cash flow yield of 8.8%, which measures the amount of cash flow that an investor is entitled to. A higher free cash flow yield is better because the company is generating more cash and has more money to pay out dividends, pay down debt, and re-invest into the company.
• Positive spread between ROCE and WACC reflects management efficiency.
• Interest coverage ratio of 5.70x implies negligible balance sheet risks.
• Despite negative impacts from COVID-19 during the second quarter, the group was able to achieve decent financial results in the past quarter, with pre-tax income at CAD 12.4 million, Adjusted EBITDA attained a record CAD 19.8 million, and revenue at CAD 91.5 million.
• Consistently maintained EBITDA margin above 10% over the past eight quarters.
• RoE in the June quarter at 6.9% whereas the industry median is negative.
• Strong Liquidity, with current ratio at 2.11 whereas industry median stood at 1.42.
• Net Margin for the June quarter stood at 10.1% vs industry median of negative 28.7%.

Cons

• Underperformed the benchmark indices over the past 1-year, YTD basis, 3-Month and 1-Month, implies relative weakness in the stock.

2QFY20 Financial Highlights

• Pollard achieved sales of CAD 91.5 million, compared to CAD 97.1 million in the three months ended June 30, 2019. Charitable gaming sales volumes decreased by CAD 9.4 million in the second quarter of 2020. The group’s charitable gaming products are sold at retail through various bars, veteran organizations, and bingo halls, which were closed in the middle of March in response to the onset of the COVID-19 virus.
• Additionally, Diamond Game’s machines are located in similar establishments and with their closure in response to COVID-19 Diamond’s sales decreased by CAD 6.9 million in the quarter compared to 2019. Additionally, the slightly lower average selling price of charitable games in 2020 further decreased sales by CAD 0.1 million.
• During the quarter, the group witnessed an increase in the instant ticket average selling price, compared to the second quarter of 2019, which increased the sales by CAD 6.9 million. This increase was a result of the sales mix in the quarter, including higher sales of Pollard’s proprietary Scratch FX® product.
• Gross profit was CAD 18.8 million (20.5% of sales) in the second quarter of 2020 compared to CAD 21.6 million (22.2% of sales) in the second quarter of 2019. This decrease in gross profit was primarily the result of the significant reduction in charitable and Diamond Game’s sales in the quarter.

Outlook

After an initial decline in March and April, the lottery industry impressively rebounded, with many lottery organizations generating record sales of instant tickets at retail during June, July and August to date. Higher retail sales do not immediately translate into higher revenue for Pollard as our production schedule is usually 2-3 months in advance of the lottery’s retail launch schedule. However, ongoing elevated retail sales over extended periods of time would lead to greater volumes of tickets ordered and greater revenue for manufacturers like Pollard.

Risk: The second wave of virus outbreak which would further lead to store closure may have an impact on the group’s performance.

Valuation Methodology (Illustrative): Price to Sales

*Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Stock Recommendation: Given the solid performance of PBL amid challenging business situation, with record adjusted EBITDA, solid liquidity, strong balance sheet and promising future business performance, we are bullish on the group’s prospect.

Therefore, after considering the aforementioned facts, the risk associated to investment and valuation, we have given a “Speculative Buy” recommendation at the closing price of CAD 17.64 on October 6, 2020 with lower double-digit upside potential.

PBL daily technical chart. Source: Refinitiv (Thomson Reuters)

MTY Food Group Inc.

MTY Group Inc (TSX: MTY) franchises and operates quick-service and casual dining restaurants under over 80 different banners in Canada, the United States and internationally. At the end of the second quarter, the company reported a total network of 7,236 locations in operation, of which 137 were corporate, 7,077 were franchised, and 22 were in joint ventures. 

The group will disclose its third-quarter result on October 09, 2020.

Q2FY20 Financial Highlights: MTY declared its quarterly results, wherein the group posted a lower revenue of CAD 97.808 million, as compared to CAD 125.571 million in the previous corresponding period (pcp). The slide in the top-line was majorly attributed to a lower system sale due to restaurant closures across most of the places on account of COVID 19 pandemic. System sales came at CAD 670.700 million, against CAD 832.300 in Q2FY19. EBITDA reflected a 47% y-o-y dip to CAD 18.2 million while EBITDA margin stood at 18.6% compared to 27.1% in Q2FY19.  The quarter reported a temporary closure of 2,757 locations, at its peak level, as compared to the closure of 1,470 as of May 31, 2020.  Free cash flows, during the quarter, stood at CAD 28.9 million, depicted a growth of 33% on y-o-y basis, driven by the refranchising of two groups of Papa Murphy's corporate locations during the quarter. Net loss stood at CAD 99.126 million, against a net profit of CAD 19.337 million in pcp.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: The operating environment of restaurant industry is likely to remain challenging in the near term because of the changes in customer consumption patterns. The company is also exposed to risks related to supply chain performance and growth strategies, its ability to mitigate the impacts of COVID-19, changes in consumer discretionary spending and eating habits, etc. 

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 appreciated ~101% in the last six months, as most of the restaurants are opening up under the strict rules incorporated by the state governments. The company is focusing on reopening its restaurants with proper safety measures and has reported a gradual reopening of restaurants. During the month of July 2020, the number of closed stores has come down to 573 locations, depicting 8% of the total stores, which is encouraging. In the short-term, the company is focused on reopening the restaurants and is aiming to rebuild customer confidence by implementing proper safety measures. Although the company doesn’t foresee sales comparability for at least the next 2-3 quarters, management believes that it will be able to regain customer confidence in the brands and restore the positive momentum. The company has taken prudent measures and has emphasized on prudent capital management by preserving its liquid cash balance. The company is observing changing consumer pattern and would offer products as per the required demand, which is a key positive and augurs well for improved business prospects. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Recipe Unlimited Corp, Premium Brands Holdings Corp., Sleep Country Canada Holdings Inc etc. Hence, considering, the valuations, trading levels, current price movement, we recommend a ‘Speculative buy’ on the stock at the closing market price of CAD 34.25 as on October 6, 2020.

MTY daily price 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.