Mainstreet Equity Corp

Mainstreet Equity Corp (TSX: MEQ) is a residential real estate company in Canada. It is focused on the acquisition, redevelopment, repositioning, and management of mid-market rental apartment buildings in Canadian markets.

Q3FY20 Financial Highlights: MEQ announced its quarterly results, wherein the Group came up with improved performance, underpinned by improved rental income from British Columbia, Alberta and Saskatchewan segments. Rental and ancillary revenue stood at CAD 37.47 million, reflecting a growth of 8% on y-o-y basis. Net operating income stood 10% y-o-y higher at CAD 23.511 million while operating margin improved to 63%, against 61% in the previous corresponding quarter. The quarter was marked by increased financing costs, higher general and administrative expenses and an increase in the depreciation expense. Profit before income tax came in lower at CAD 8.24 million, as compared to CAD 14.60 million in the previous corresponding period (pcp) due to a loss from change in fair value amounting to CAD 2.527 million against a gain of CAD 5.344 million in pcp. Net profit and total comprehensive income stood at CAD 10.873 million as compared to CAD 11.357 million in pcp, partially supported by a deferred income tax recovery amounting to CAD 2.633 million. Average vacancy rate during the quarter stood at 8% as compared to 6.4% in the previous corresponding quarter.

Q3FY20 Income Statement Highlight (Source: Company Reports)

Risks: The Company’s cash flow might impact adversely, if the vacancy rate increases. Further, due to challenging economic environment, the group might face a delay in rent collection.

Valuation Methodology: EV/EBITDA based valuation (Illustrative)

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

Stock Recommendation: The stock of MEQ stood resilient in the recent past amidst the market volatility on account of COVID 19 pandemic. The company recorded an increase in the rental income from its prime locations such as British Columbia and Alberta, which is key positive for the company and indicates a strong performance when the economy revives. The group believe that the current scenario with lower costs for acquisitions and debt is likely to provide decent opportunities to expand the portfolio. The group is planning to accelerate its counter-cyclical growth strategy and expect the real estate market to provide favourable buying conditions. Furthermore, tightened lending requirements for homebuyers by Canada Mortgage and Housing Corporation (CMHC) would be beneficial of the overall industry and are likely to support the rental market, which is likely to improve the overall business prospect for the Company in the coming days. The Company continually monitors short-term and long-term interest rates in order to take advantage of the interest rate volatility and to maintain cost-effectiveness and flexibility of capital. The stock moved ~32% in the last three months and closed above its 200-days simple moving average (SMA) of CAD 68.39, indicating a bullish pattern. We have valued the stock using the EV/EBITDA based relative valuation approach and arrived at a target price, which suggests a lower double-digit upside potential (in % terms). For the said purpose, we have considered peers like Boardwalk Real Estate Investment Trust, Killam Apartment REIT and InterRent Real Estate Investment Trust etc. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 70.2 on August 13, 2020.

MEQ daily Technical Chart. Source: Refinitiv, Thomson Reuters

Colliers International Group Inc.

Colliers International Group Inc. (TSX: CIGI) is a leading global real estate service and investment management company. The Company operates in 68 countries and provides expert advice and services to maximize the value of the property for real estate occupiers, owners and investors.

Q2FY20 Financial Highlights: CIGI announced its quarterly results, wherein the Company posted revenue of USD 550.206 million, declined significantly from USD 745.517 million in the previous corresponding quarter. Lower activities Leasing and Capital Markets activity across the Americas region coupled with lower activity in each service line from EMEA regions stood as prime headwinds during the quarter. Furthermore, the Company reported a 20% lower income from the Asia pacific geography, which also impacted the Group’s performance. Operating earnings slide to USD 14.523 million, as compared to USD 57.198 million in the previous corresponding quarter, primarily due to lower income, higher depreciation and amortization of intangible assets, partially offset by lower selling, general and administrative expenses. Adjusted EBITDA stood lower at USD 59.962 million, as compared to USD 87.323 million in the previous corresponding period (pcp). Net earnings stood considerably lower at USD 6.483 million as compared to USD 35.575 million in pcp, due to lower operating income, partially offset by lower interest expense and lower income tax expense. The Company ended the quarter with cash and cash equivalent of USD 147.169 million while total assets stood at USD 2,794.989 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to COVID-19, there might be a reduction in real estate transactions, and the group’s client might reduce their expenditure. This may result in a reduction in the demand for the services the Company provides. Further, a decrease in property values and vacancy rates could negatively impact sales and leasing commissions.

Valuation Methodology: EV/EBITDA Based (Illustrative)

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

Stock Recommendation: The stock soared ~16% and ~34% in the last one month and three months, respectively, outperforming the index by ~10% and ~19%, respectively. The group reported better than expected results across all segments and regions during the second quarter despite the unprecedented impact of COVID-19, especially in Leasing and Capital Markets. The group stated that the majority of its earnings come from Investment Management and Outsourcing & Advisory segment, which offers high value-add professional services that are recurring and contractual. The group expects gradual improvement in Leasing and Capital Markets segment in the second half of the year. The group expects Transactional Leasing and Capital Markets revenues to remain below 2019 levels, although the scale of decline is likely to moderate in the third and fourth quarters. Investment Management and Outsourcing & Advisory are expected to remain relatively stable for the balance of the year, with some variability depending on market conditions. The Company is focusing on the implementation of certain cost efficiency programs and received wage subsidies totaling to USD 10.2 million for FY20 from governments in several countries. We believe the above measures and Government grants would help the Company to sail through during the turbulent times. Further to ensure ample liquidity, the group issued USD 230 million of 4% Convertible Senior Subordinated Notes due 2025 during the month of May 2020, which is a key positive. We have valued the stock using the EV/EBITDA based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered industry (Real Estate Operations) median multiple on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 84.55 on August 13, 2020.

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

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