Canaccord Genuity Group Inc (TSX: CF) is an independent, full-service financial services firm, with operations in two principal segments of the securities industry: wealth management and capital markets.

Revenue Mix

Pros

• Offering a decent dividend yield of 3.33%. The board has announced First quarter dividend of CAD 0.055 per common share; increased by 10% compared to F2020 quarterly dividends.
• Solid Q1FY21 performance reflects the group’s agile and defensive business mix that allows to shift resources where needed to ensure excellent client experiences in any environment.
• Interest coverage ratio of 4.03x implies lower balance sheet risk as compared to its competition, as industry median interest coverage ratio stood at 1.74x.
• Positive spread between ROCE and WACC reflects financial prudence and efficiency of the management.
• Total Debt to Equity ratio stood at 36%, whereas peers average stood at 81.6%

Cons

• Lower margin profile, with EBITDA margin at the end of the June quarter of 2021 stood at 15.1% vs Industry median of 37.3%, Operating margin of 11.6% vs Industry median of 31.2%.

1QFY21: Financial Highlights

• Revenue up 16% to CAD 377.7 million against the corresponding previous quarter.
• Global wealth management revenue increased by 6.3% on a YoY basis to CAD 137.9 million.
• Global Capital markets revenue surged by 23.6% to CAD 234.9 million.
• Diluted Earnings Per Share up 8.7% to CAD 0.25.
• Net Income improved 19% on a YoY basis to CAD 29.0 million.
• Globally, total client assets amounted to CAD 68.9 billion on June 30, 2020, an increase of 13.4% on a sequential basis.
• During the quarter, The Company expanded its international investment banking capability to Latin America and the Caribbean with the appointment of Gene McBurney to lead the firm’s Investment Banking efforts and bolster its market-leading mining franchise.

Source: Refinitiv (Thomson Reuters)

Risk: Any management disruption could result in a loss of clients and customers, or revenues from clients and customers, and could significantly affect the Company’s business and results of operations. Economic conditions, competition and market factors such as volatility in the Canadian and international markets, interest rates, commodity prices, market prices, trading volumes and liquidity will have a significant impact on the Company’s profitability.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock Recommendation: The company reported a decent quarter, amidst a major jolt in the economy, which is impressive. The company reported strong support from the global wealth management operations and reported an increased capital raising and advisory activity within the core focus areas in the recent quarters. The company has continued to post decent performances in the recent past, aided by improved transaction activity and growth in client assets.

Therefore, given the aforementioned facts and valuation, we have given a “Buy” recommendation at the closing price of CAD 6.6 on October 6, 2020.

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

Home Capital Group Inc.

Home Capital Group Inc. (TSX: HCG) is an integrated finance company which offers residential and commercial mortgage lending, securitization of insured mortgage products, consumer lending, and credit card services.

Q2FY20 Financial highlights: HCG announced its quarterly results, wherein net interest income was reported at CAD 115.815 million, against CAD 97.534 million in the previous corresponding period (pcp). The growth was aided by the improved performance from the residential and commercial loan originations. Furthermore, the group posted an improved net interest margin at 2.40% due to higher average yields on non-securitized products coupled with a decline in deposit liabilities rates. The positives were partially offset by the increased balance of low yielding liquid assets. The business reported improvement in the Adjusted Efficiency Ratio to 47.9% against 51.9% in the previous quarter. The company reported total deposits at CAD 14.01 billion as compared to CAD 13.51 billion in Q2FY19. The total loan portfolio, at the end of the quarter, stood at CAD 17.21 billion, reflecting a slight increment of 0.5% over Q2FY19. The quarter was marked by higher originations of CAD 1.50 billion in Q2FY20, compared to CAD 1.28 billion in pcp, aided stable real estate market. Net income, during the quarter, stood at CAD 34.132 million, increased from CAD 31.907 million in pcp, underpinned by a decline in the provision for credit losses, while higher non-interest expenses remained a drag.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: The company is exposed to a variety of risks including credit risk, liquidity, and funding risk. It may also be impacted by structural interest rate risk, operational risk, investment risk, strategic risk, and reputational risk.

Valuation Methodology: Price to Book Based (Illustrative)

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

Stock Recommendation: The stock of HCG reported a handsome gain of ~55% in the last six months.  Despite a tepid economic scenario, the group reported a decent result. The group’s balance sheet remained strong, with an improvement in Common Equity Tier 1 Capital Ratio to 18.48% from 17.73% in the previous quarter. A higher Common Equity Tier 1 Capital Ratio is an indication of prudent risk management. During the quarter, the company launched new projects in digital banking and loan origination, which is expected to increase market penetration. As the real estate market is showing sign of improvement, we expect a revival in the overall business prospects, which is a key positive. The economy is on the verge of recovery, and the Management highlighted that the credit losses would likely to remain under control. Notably, the company reported a slide in the provision for credit losses despite a topsy-turvy economic scenario, which is commendable. We have valued the stock using Price to Book based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers industry (Financials) median on NTM basis. Considering the aforesaid facts, and current price movement, we recommend a ‘Buy’ rating in the stock at the closing market price of CAD 22.2 on October 6, 2020.

HCG 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.