Equitable Group Inc

Equitable Group Inc. (TSX: EQB) is a Canada based Bank, which operates across single-family lending services, and offers mortgages for owner-occupied and investment properties. The Group has commercial lending services segment, securitization financing, and deposit services, which provides savings products, including guaranteed investment certificates, high-interest savings accounts, and deposit notes. 

The Group announced a quarterly dividend of CAD 0.37 per common share, payable on June 30, 2020.

Q1FY20 Financial Highlights: EQB declared its quarterly results, wherein the company reported an increase in interest income of at CAD 290.19 million, as compared to CAD 254.60 million in the previous corresponding quarter. Higher interest income was driven by significant growth from retail and commercial loans segments followed by an increased income from investments. Net interest income increased to CAD 120.15 million, from CAD 105.35 million in pcp, thanks to higher interest income. The quarter accounted for higher provision for credit losses due to the tepid macro scenario and reported net interest income after provision for credit losses at CAD 84.46 million, lower than CAD 95.72 million in Q1FY19. Net income plunged to CAD 25.97 million, as compared to CAD 41.66 million in the previous corresponding quarter due to a rise in compensation and benefits followed by higher other expense. Total deposit increased 6% on an annual basis to CAD 15.5 billion. Retail loans grew 11% while commercial loan grew 7%. The Company exited the quarter with cash and cash equivalents of CAD 737.335 million and total assets of CAD 29,153.87 million.

Q1FY20 Income Statement Highlights (Source: Company reports)

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

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

Stock Recommendation: The stock of EQB corrected ~37% so far this year. The Group reported a stable Common Equity Tier 1 Capital Ratio of 13.5%, in line with 13.6% in Q4FY19, which is commendable. The Group is seeking growth from the digital banking segment and is well-positioned to drive growth supported by its cloud-based technology. The group’s digital bank platform experienced 22% year-over-year growth in deposits and a 38% increase in its customer base which now stands at over 110,000. Amidst the macro challenges, the Group has reported a stellar growth in its retail and commercial loan segment, which is impressive. However, the Bank is compelled to make higher provisions on account of the current distress economic scenario, which has taken a toll on the profitability. The stock moved ~21% in the last five trading sessions, outperforming the index by ~2% and trading above its 20-days and 50-days simple moving average (SMA) of CAD 61.85 and CAD 59.66, respectively, indicating a bullish trend. We have valued the stock using P/BV 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 (Banking Services) average on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 68.76 on May 27, 2020.  

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

ECN Capital Corp.

Business Resilience in the Face of COVID-19: ECN Capital Corp. (TSX: ECN) is a financial business service provider. It originates, structures, and manages financial products and provides advisory services for financial institutions. As on 27 May 2020, the market capitalization of the company stood at CAD1.10 billion.

Quarterly Performance (For the Period Ended 31 March 2020): During the first quarter ended 31 March 2020, ECN Capital reported adjusted EBITDA of USD27.7 million and a YoY growth in adjusted net income to USD0.06 per share, up from USD0.05 per share for the same period last year. In the same time span, the company managed and advised total earning assets of USD33.6 billion and witnessed an increase in originations from USD419 million in 1Q19 to USD509 million in 1Q20. During the quarter, the Board as authorized and declared a quarterly dividend of USD0.025 per outstanding common share which will be paid on 30 June 2020.

Bank Partner Renews USD600 Million Funding Commitment with Service Finance: The company announced that Service Finance has renewed its largest bank funding commitment. Under the renewed commitment, the bank partner is committed to purchase up to USD600 million in Service Finance prime and super prime retail installment contracts for home improvement projects across 50 states. 

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: Despite the softer market conditions due to the outspread of COVID-19, the company reported strong Q1 earnings and showed the resiliency of each of its businesses. ECN continues to expect strong growth in earnings in FY20. During 1H20, EBITDA margin of the company stood at 36.6%, higher than the industry median of 33.4%. In the same time span, Assets/Equity ratio of the company was 2.46x, lower than the industry median of 4.44x. The stock of ECN gave a return of 3.93% in the past one year and a return of over 28.94% in the last one month. The stock is trading near the average of its 52-weeks’ band of CAD2.68- CAD6.20, and thus holds further potential for growth. We have valued the stock using the price to earnings multiple based illustrative relative valuation method and have arrived at a target price, offering an upside of lower double-digit (in percentage terms). Considering the current trading levels, attractive returns in past one month, and the financial resilience of the business despite the global pandemic, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD4.53, on 27 May 2020.

ECN Daily Technical Chart (Refinitiv, Thomson Reuters)

Disclaimer

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