Mullen Group Ltd

Mullen Group Ltd (TSX: MTL) is a logistics services and supplies trucking services. The Group also provides specialized transportation services to natural gas and oil industry in the Western Part of Canada. The Group’s operations are divided into three reportable segments being Specialized & Industrial Services, Logistics & Warehousing and Less-Than-Truckload.

Financial Highlights – Q2 and H1 Financial Year 2020 (30^th June 2020)

(Source: Quarterly Report, Company Website) 

In the first half of the financial year 2020, due to lower revenue from all divisions, the revenue declined by 9.8% to $575.7 million (H1 FY2019: $638.6 million), and revenue in Q2 FY2020 declined by 19.3% to $257.5 million (Q2 FY2019: $319 million). The operating income (before depreciation and amortization) increased by 5% to $100.2 million in H1 FY2020 (H1 FY2019: $95.4 million), and operating income (before depreciation and amortization) increased by 7% to $55 million in Q2 FY2020 (Q2 FY2019: $51.4 million), reflecting control over operating expenses. The net income stood at $27.7 million in the first half of the financial year 2020 (H1 FY2019: $43.3 million), reflecting a decline of 36% and net income in Q2 FY2020 declined by 27.4 per cent to $23 million (Q2 FY2019: $31.7 million). The cash balance as on 30 June 2020 stood at $111.9 million (30 June 2019: $84.8 million), reflecting an increase of 32%. The total assets declined by 1.3% to $1,735.9 million as on 30 June 2020 (30 June 2019: $1,758.2 million).

Share Price Performance

Mullen Group Ltd shares closed at CAD 9.0 at the time of writing after the market close on 24 July 2020. Stock's 52 weeks High is CAD 10.62 and Low is CAD 3.85.

Key Risks

The Company operates in a challenging market conditions which may impact the operational performance and reduce financial performance. The business of the Company is affected by a change in government policies and regulations. The Group’s operations are negatively impacted by risks related to interest rate and Liquidity.

Conclusion

The Company has shown a decline in financial performance in Q2 and H1 of the financial year 2020. Both the top-line and the bottom-line performance have declined. The Group managed to improve its operational performance, which will improve profitability in the coming future. The Group managed to increase liquidity position with a decent balance sheet. The cash flow from operating activities has increased significantly for the period, reflecting strong operational income. MTL has a decent working capital, while the net debt has also increased for the period. However, the Group take multiple actions as an early response to reduce costs. The revenue in Q1 declined by 20% approximately due to lockdown imposed by government and change in spending habits of consumers. The Group is actively seeking acquisitions for accelerating growth and achieving strategic objectives.

Based on the above rationale, we have given a “Hold” recommendation at the closing price of CAD 9.0 (as on 24 July 2020).

Canfor Pulp Products Inc.

Canfor Pulp Products Inc. (TSX: CFX) produces and distributes northern bleached softwood kraft pulp, or NBSK pulp and paper. The Company has two operating segments, namely, pulp and paper and derives the majority of the revenue from the pulp segment. The company also generates and sells electricity from biomass out of its pulp plants in Western Canada.

Q2FY20 Financial Highlights: Canfor Pulp Products declared it second quarter results, wherein the company’s operating results reflected direct and indirect impacts of the COVID-19 pandemic on global markets, and more precisely the pulp and paper business. The Company’s revenue stood at CAD 250.7 million, significantly down from CAD 319.5 million, a year ago. The decline was driven by a ~13% y-o-y decline in pulp production, which stood at 2,60,000 tonnes. Global pulp prices improved from April 2020, largely driven from increased demand from at-home tissue segments combined with supply disruptions, principally in Latin America and Australasia.  Meanwhile, within the printing and writing segment, the demand was soft during the second half of the quarter. CFX reported an operating loss of CAD 6.3 million, down from the profit of CAD 18.4 million in Q2FY19, due to the inclusion of finished pulp and raw material inventory write-down of CAD 8.2 million. The Company reported an adjusted operating income of CAD 1.9 million, down from CAD 31.8 million in the previous corresponding period (pcp). Net loss during the quarter stood at CAD 1.1 million as compared to a net profit of CAD 10.6 million in Q2FY20.

Q2FY20 Financial Snapshots (Source: Company Reports)

Risks:  The company procure most of the fiber from the Fibre Supply Agreements with Canfor group. The company’s financial results could adversely affect if Canfor is unable to provide the current volume of wood chips as a result of mill closures, whether temporary or permanent.

Valuation Methodology: EV to EBITDA Based (Illustrative)

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

Stock Recommendation: The stock corrected ~31% so far this year amid steep correction in the equity market owing to COVID-19 pandemic. The Company has ample liquidity of CAD 49.3 million, and the Company remains in full compliance with all covenants relating to operating loan facilities and term debt and expects to remain so for the foreseeable future. Further, to retain its liquidity levels, CFX has reduced its capital spending combined with additional measures which are encouraging. Going forward, bleached kraft paper markets are anticipated to be relatively stable in North America through the third quarter of 2020, with a steady projected demand for bleached kraft paper products that meet food grade specifications. We have valued the stock using EV/EBITDA value-based relative valuation method and have arrived at a target upside of single-digit (in percentage terms). For the said purposes, we have considered peers like Western Forest Products Inc, Interfor Corp and Norbord Inc etc. Hence, we recommend a ‘Hold’ rating on the stock at the current market price of CAD 6.11 on July 24, 2020.

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

Disclaimer

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