Shopify Inc.

Shopify offers an e-commerce platform primarily to small and midsize businesses. The firm has two segments: subscription solutions and merchant solutions. Shopify provides inbuilt-platform and services which enhances shopping experience for the consumers.

Q2FY20 Financial Highlights: Shopify reported a stellar set of numbers and recorded its first quarterly profit aided by strong momentum in Shopify platform, which grew 71% from Q1FY20 on account of the shift of business to online coupled with the extension of the free trial period on standard plans from 14 days to 90 days. Total revenue stood at CAD 714.3 million, reflecting a 97% increase from Q2FY19. The quarter was marked by a strong growth in the Subscription Solutions revenue to CAD 196.4 million, up 28% year over year, aided by a higher number of merchants joining the platform. Merchant Solutions revenue growth accelerated 148% to CAD 517.9 million, primarily driven by the growth of GMV. Gross profit surged to CAD 375.034 million from CAD 204.765 million in the previous corresponding period (pcp). Total operating expenses stood higher at CAD 374.750 million from CAD 244.385 million in pcp due to higher sales and marketing expenses, increase in research and development expenses, an elevated General and administrative cost, and significantly higher transactional & loan losses. Income from operations stood at CAD 0.284 million as compared to a loss of CAD 39.620 million in pcp. Net income stood higher at CAD 35.998 million as compared to a net loss of CAD 28.678 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company derives its revenue in both USD and CAD; hence, it is exposed to foreign exchange risk.

Stock Recommendation:  The Shopify stock made a dream run in the recent past and grew ~124% and ~233% in the last six months and nine months, respectively, due to the growing traction in the e-commerce segment. During the quarter, the Company witnessed a 119% growth in Gross Merchandise Volume (GMV), which is encouraging. The COVID-19 pandemic has accelerated the growth of eCommerce, shifting a larger share of retail spending to online commerce. We expect this trend to continue, which is a key positive for the group. Meanwhile, Shopify announced a partnership with the Government of Canada through the ‘Go Digital Canada’ program to bring thousands of small Canadian businesses online and help them adapt to a digital economy. Further, the group expects entrepreneurs to continue to recognize the importance of multi-channel selling and direct-to-consumer fulfilment, and for consumer concerns about COVID-19 to drive further adoption of digital commerce while reinforcing the behaviour of buyers already shopping online. Shopify remains uniquely positioned to level the playing field for entrepreneurs during this period of rapid change in the retail landscape. Investors should note that the stock was trading above the 200-days simple moving average of CAD 747.83, which indicates a bullish trend. Hence, considering the aforesaid factors, price movement and outlook, we give a ‘Hold’ rating on the stock at the closing price of CAD 1,401.23 on July 29, 2020.

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

Toromont Industries Ltd

Toromont Industries Ltd (TSX: TIH) offers industry-leading rental operations, a complementary material handling business and an agricultural equipment business. The Group operates through two business segments, namely, the Equipment Group and CIMCO.

Q2FY20 Financial Highlights: Toromont industries posted a moderate quarterly result due to a soft demand scenario and low activity levels. Revenue stood at CAD 849.6 million, reflecting a decline of 13% y-o-y basis. The quarter was marked by lower product support and rental revenues, which were down by 15% and 31%, respectively. Equipment sales were lower by 8%, reflecting lower new equipment sales across most markets. Operating income, during the second quarter, stood at CAD 77 million as compared to CAD 111.0 million in the second quarter of FY20, primarily attributable to lower gross margins on account of lower rental fleet utilization and sales mix. Backlogs were reported at CAD 496.5 million at the end of the quarter against CAD 551.5 million in the previous corresponding period (pcp). Net earnings stood at CAD 51.2 million, reflecting a 34% decline over the previous corresponding quarter.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company might face some issues owing to COVID-19, which includes, staff shortages, lower customer demand, disruption to the supply chains, impact on capital resources, as well as increasing government regulations or intervention. All of these may negatively impact the business, financial results and conditions of the company.

Valuation Methodology: Price/CF Based (Illustrative)

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

Stock Recommendation: The stock of TIH stood resilient in the recent past and appreciated ~14% and 12% in the last three months and twelve months, respectively. The Company provides equipment services to construction and agriculture industry which witnessed a halt in the operating activity in the recent past due to the COVID 19 scenario. After the lowest level of operating activities in April 2020, the Business witnessed a recovery for May and June, which is impressive. We expect an improved demand scenario in the near term from the agriculture segment to lead the business prospects while a gradual revival within the construction segment would further drive demand. The Company maintained its very strong financial position. Leverage, as represented by the net debt to total capitalization ratio, was 12% as at the end of June 2020, compared to 15% at the end of December 2019, and 26% at the end of June 2019. Notably, the stock was trading above the 200-days simple moving average (SMA) of CAD 67.28. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a single-digit upside potential (in % terms). For the said purpose, we have considered the peers like SNC-Lavalin Group Inc, WSP Global Inc and Watsco Inc etc. Hence, considering the aforesaid facts, we recommend a 'Hold' rating on the stock at the closing market price of CAD 73.72 on July 29, 2020.

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

Disclaimer

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