High Liner Foods Incorporated

High Liner Foods Incorporated (TSX: HLF) is a Canada-based company, engaged in the processing and marketing of frozen seafood products. The Company produces a range of products from breaded and battered items to seafood entrees, which are sold to North American food retailers and foodservice distributors.

Key Highlights

• Trying to capitalize the market share: The industry witnessed the addition of over half a million new customers in the frozen seafood category in 2020 as frozen seafood is becoming fastest growing section of the frozen food aisle. The company feels that they are ready to seize the opportunity to expand its value-added business, capitalizing its market leadership in Canada along with growth in the US market.

• Increase in dividend: The group increased its quarterly dividend to CAD 0.07 per share compared to CAD 0.05 per share paid in the previous quarter. The group increase its dividend at a time when most of the businesses are cutting down or suspending dividend. This shows the financial flexibility of the group.
• Reduced Net debts: The company brought down its Net Debt level by USD 26.3 million to USD 286.0 million at the end of Q3 2020 compared to USD 312.3 million at the end of Q3 2019.

Financial Overview of Q3 2020

Source: Company

• Sales volume in Q3 2020 decreased by 5.5 million pounds, or 9.1%, to 54.7 million pounds compared to 60.2 million pounds in the previous corresponding period, due to the impact of COVID-19 on company’s foodservice customers.
• Sales decreased by USD 25.5 million, or 11.6%, to USD 194.6 million compared to USD 220.1 million, reflecting the lower sales volumes and changes in sales mix.
• In Q3 2020, gross profit decreased by USD 3.5 million, or 8.3%, to USD 38.9 million compared to USD 42.4 million in pcp; however, gross profit as a percentage of sales increased to 20.0% compared to 19.3% in the same period.
• On the back of a decrease in distribution expenses and SG&A expenses, the company witnessed an increase in Adjusted EBITDA in Q3 2020 by USD 2.6 million, or 15.8%, to USD 19.1 million compared to USD 16.5 million in pcp, and as a percentage of sales, Adjusted EBITDA increased to 9.8% compared to 7.5%.
• The company reported an increase in Net income by USD 6.2 million to USD 3.8 million compared to a net loss of USD 2.4 million in pcp.  

Risk associated with investment

The performance of the company's business is prone to several risks which affect income and liquidity. Risks related to resource supply, food processing, suppliers, customers, competition, and foreign exchange exposure are beyond management control.

Stock recommendation

The company's foodservice business continues to steadily rebound, with quarter over quarter improvements on volumes since COVID-19 hit in March 2020. Foodservice customers continue to respond favourably to the company's expanded value-added branded products which are well suited to the new operating environment. The company continues to benefit from the diversity of its foodservice business through this period with institutional foodservice customers, like health care facilities, providing stable demand. High Liner Foods' three plants continue to operate at planned capacity and higher efficiency rates to meet demand from its retail and foodservice customers and consumers. The company's overall supply chain continues to be robust with no significant issues related to production, transportation and warehousing activities nor the procurement of raw materials and ingredients. On the valuation front, the stock is available at a forward EV to Sales Multiple of 0.6x, which is lower than the industry (Food & Tobacco) median of 1.5x. Hence, considering the aforementioned facts and current trading levels, we recommend a 'Hold' rating at the closing price of CAD 11.0 on November 10, 2020.

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

Parkland Corp

Parkland Corp (TSX: PKI) is an independent supplier and marketer of fuel and petroleum products and a leading convenience store operator. Parkland services customers across Canada, the United States, and the Caribbean region through three channels: Retail, Commercial and Wholesale.

Key highlights

• The company announced an increase of CAD 50 million in its 2020 total capital expenditure guidance to CAD 325 million.

Source: Company

• Maintaining Healthy Liquidity: The company is maintaining decent liquidity levels, which increased significantly from December 31, 2020 level. As on September 30, 2020, the company had Cash and cash equivalents worth CAD 356 million and Unused credit facilities of CAD 1.2 billion. We expect the current liquidity level to help the group in navigating through the current challenging time.

Source: Company

• Consistent Dividend Payment: The company’s shareholders are eligible to receive CAD1.214 per share per year in dividends, paid monthly cash dividend of CAD 0.1012 per share. At the last traded price, the stock was offering a dividend yield of 3.05%, which is decent amid the low interest rate environment.

Financial overview of Q3 2020

• On the back of Canada and the international segment, the company reported the degraded Sales numbers of CAD 3,505 million in Q3 2020, as compared to CAD 4,605 million in Q3 2019.
• The company recorded Adjusted EBITDA of CAD 338 million in Q3 2020, representing an increase of 12% compared to the same period in 2019. The reasons behind the increase in Adjusted EBITDA were healthy cost controls, geographical diversification and the strong performance shown by convenience stores in Canada, achieving 10.7% same-store sales growth in the reported quarter.
• Net earnings reported by the company in Q3 2020 was CAD 91 million, representing an increase of CAD 65 million as compared to CAD 26 million in the same period in 2019. 

Risk associated with investments

The company is exposed to many risks, including general economic, market and business conditions, including the duration and impact of the Covid-19 pandemic; ability to execute its business strategies, industry capacity, competitive action by the other companies, refining and marketing margins, and the ability of suppliers to meet commitments. 

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock recommendation

Despite COVID-19 restrictions and the closure of the tourism industry, which significantly impacted aviation and retail volumes, International sement's performance was sustained by geographical diversification, executing profitable supply initiatives, and implementing healthy cost controls. The convenience stores in Canada have shown resilience by achieving 10.7% same-store sales growth in Q3 2020. The company is focusing on expanding margins across its fuel and non-fuel categories. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 39.80 as on November 10, 2020. We have considered Maple Leaf Foods Inc, Canadian Tire Corporation Ltd, Superior Plus Corp etc. as the peer group for the comparison.

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

Disclaimer

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