Ag Growth International Inc.

Ag Growth International Inc. (TSX: AFN) produces portable and stationary grain handling, storage and conditioning equipment, including augers, belt conveyors, grain storage bins, grain handling accessories, grain aeration equipment and grain drying systems. 

Q1FY19 Financial Highlights: AFN reported a decent topline growth, while failed to retain the momentum in its bottom line. Sales during the first quarter of FY20 stood at CAD 229.10 million, higher than CAD 215.03 million in the previous corresponding quarter, aided by a 42% growth from the international segment, while lower sales from Canada remained a drag. The quarter was marked by higher cost of goods sold, which increased to CAD 167.94 million as compared to CAD 151.28 million in Q1FY19, due to an elevated inventory price. The Company reported a loss before income tax at CAD 57.56 million, as compared to a profit of CAD 17.82 million in pcp. The decline was primarily attributable to higher SG&A expenses, higher depreciation, and FX loss. The Company reported a net loss of CAD 48.84 million, as compared to a profit of CAD 13.22 million pcp.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: P/E Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock of AFN corrected ~45% so far this year. The operations of the group were hindered by temporary plant closures in Italy, France, Brazil and India, while the products are categorized as ‘essential services’ within the North American Geography. All the facilities are operational as of now and operating at a capacity of 50% to 80%. Within the Farm segment, commercial backlogs of Fertilizer and Food projects stands at 27%, higher than the previous quarter. There was no production suspension to date in Canada. The management believes that post-crisis demand will be positively impacted as the world builds additional redundancy into the global food infrastructure to account for similar events in the future. Within the international commercial segment, the company witnessed a higher order-inflow, reflecting a higher backlog. The management has deferred the growth capital expenditure to preserve the liquidity and decided to invest in maintenance capex. The group’s liquidity seems sufficient to surpass the current economic cycle and would smoothly support its working capital requirements. The stock has generated a ~25% return in the last one month and trading above its 20-days and 50-days simple moving average (SMA) of CAD 26.78 and CAD 22.29, indicating a bullish trend. The management also took a prudent step by lowering its annual dividend to CAD 0.60 per common share, ensures further support to cash flows. We have valued the stock using P/E based relative valuation method and have arrived at a target upside of lower-double-digit (in percentage terms). For the said purposes, we have considered industry (consumers non-cyclical) average on NTM basis. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 30.13 on May 26, 2020.   

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

New Look Vision Group Inc.

New Look Vision Group Inc. (TSX: BCI) offers eye care products and services including eyewear, contact lenses, sunglasses and eye care accessories across Canada. As of 28, December 2019, the Company reported a total network 393 of stores, consisting of 291 wholly owned corporate, 38 majority-owned, 43 jointly owned and 21 franchised locations.

The Group has suspended its dividend payment on a temporary basis in order to preserve the liquidity. During the quarter, the Company confirmed the acquisition of the Edward Beiner Group which has resulted in an addition of 12 stores for BCI.

Q1FY20 Financial Highlights: For the period ended March 28, 2020, New Look posted a decline in revenue of CAD 68.03 million, depicting a de-growth of 4.8% over the first quarter of FY20, due to a temporary shut-down of its stores in response to the COVID 19 crisis. Earnings before depreciation and amortization stood higher at CAD 14.48 million, as compared to CAD 10.54 million in the previous corresponding quarter. The improvement was well supported by lower other operating expenses, lower employee remuneration expenses and marginally lowered materials consumed. However, the Company failed to report the momentum in its bottom-line and reported a net loss of CAD 0.272 million, as compared to a profit of CAD 2.18 million. The decline was primarily attributed to a significant surge in depreciation, amortization and loss on disposal and financial expenses. The Company exited the quarter with a cash balance of CAD 10.90 million, followed by a total asset of CAD 556.164 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of BCI corrected ~20% YTD and currently trading near to its 52-weeks low of CAD 20.12. The Company has a strong brand presence amongst the customers and operates with established brands like new Look Eyewear, Greiche & Scaff, Vogue Optical, and Iris. The group bore the heat of ongoing lockdown and went through a ~80% closure of its stores. We believe, the demand for group’s offerings is likely to return as the lockdown restrictions start to ease. Going forward, the group would focus on exploring profitable growth opportunities and achieving synergies through the successful integration of acquisitions. The group is well-capitalized and seems to have ample liquidity to surpass the current slowdown on account of COVID 19 pandemic. New Look is well-positioned to weather the current disruption, with its operational efficiencies, existing credit lines and strong balance sheet. The stock is available at EV to Sales of 0.2x, significantly lower than the industry median (Specialty Retailers) average of 7.4x. Hence, we recommend a ‘Speculative Buy’ on the stock at the current price of CAD 25.5 on May 26, 2020.

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

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