Pembina Pipeline Corporation (TSX: PPL)

Pembina Pipeline Corporation (TSX: PPL) is a leading transportation and midstream service provider that has been serving North America’s energy industry for 65 years. Pembina owns an integrated system of pipelines that transport various hydrocarbon liquids and natural gas products produced primarily in western Canada.

The Board of Directors declared a monthly dividend of CAD 0.21 per share, payable on June 15, 2020.

Q1FY20 Financial Highlight: PPL announced its quarterly results, wherein, the Company reported revenue of CAD 1,671 million as compared to CAD 1,968 million in pcp. However, net revenue increase to CAD 865 million as compared to CAD 774 million recorded in Q1FY19. The total volume increased to 3,508 mboe/day, as compared to 3,402 mboe/ day in pcp. The group’s gross profit stood to CAD 728 million, marking a significant improvement from CAD 588 million in the previous corresponding quarter. The group recorded a higher gross profit in both Pipelines and Facilities segment owing to the positive impacts of recent acquisitions. The Company’s adjusted EBITDA increased to CAD 830 million against CAD 773 million in pcp. The Company earnings came at CAD 314 million, stood at par with CAD 313 million in Q1FY19. The profitability took a hit due to the lower margins on crude oil and lower price realizations from NGL sales, which was partially supported by unrealized gains on commodity-related derivatives. The Company spent CAD 483 million as capital expenditure as compared to CAD 361 million in the previous corresponding quarter.

Valuation Methodology (Illustrative):  EV/EBITDA based Relative Valuation

Note: All forecasted figures and peers have been taken from Refinitiv (Thomson Reuters), NTM-Next Twelve Months

Stock Recommendation: The stock of PPL corrected ~33% in the last one year due to the demand destruction of crude oil owing to COVID-19. Due to the stiff corrections in crude oil prices and demand destruction, most of the oil-producing companies are going through severe pain due to the lower demand scenario persisting across the global markets. The group expects a decline in volume, which is expected to be mitigated as the business is protected by long term contracts. The group expects its marketing business to be affected negatively owing to a rapid and significant decline in energy prices. However, the group is planning to mitigate the effect by ~$100 million of operating and administrative cost savings and efficiencies. The Company has ample liquidity, with CAD 2.5 billion of cash and borrowing capacity and a new CAD 800 million revolving credit facility, which would help it to sail through challenging times. The group is a dividend aristocrat and has not cut the dividend in these challenging times. The stock is offering a dividend yield of ~7.9%, which is impressive looking at the current interest rate environment. We have valued the stock using EV/EBITDA based relative valuation approach and taken peers like TC Energy Corp (TSX: TRP), Energy Transfer LP (NYSE: ET), Inter Pipeline Ltd (TSX: IPL)  etc. and arrived at a target price offering a double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 31.83 as on May 08, 2020.

PPL One-Year Daily Price Chart, Source: Refinitiv (Thomson Reuters)

Canadian Tire Corporation Ltd (TSX: CTC.A)

Canadian Tire Corporation Ltd (TSX: CTC.A) is a Canadian company with a portfolio of businesses, which includes a Retail division, CT REIT and a Financial services segment. It was founded in 1992 and currently, it has more than 1,740 outlets.

On 6^th August 2020, the Group will release its next earnings release for Q2 2020.

Recent News

30^th April 2020: The CTC Group donated CAD 5 million in relation to COVID-19 Response Fund for aiding Canada’s community and frontline healthcare workers.

Trading Update (as on 28^th March 2020) – Depicting a Quantum Leap in E-commerce Business

As on 7^th May 2020, the CTC Group released its first-quarter update for FY20, which highlighted the strong growth across its e-commerce and digital business. Despite the unprecedented challenges, the Company stayed resilient and agile, while adopting several initiatives to cope up with Covid-19 disruption such as launched a special support system for employees and workers, secured an additional CAD 650 million of credit facility, suspended share repurchase programme, deferred planned capital expenditure and prudently managing the working capital and operating expenses.  The Company generated 0.7 per cent comparable store sales growth in Q1 FY20 against the Q1 FY19. During the first quarter 2020, the Group retail sales declined by 2.7 per cent (against Q1 FY19) to CAD 75.7 million. The Company is progressing well with Operational Efficiency program to achieve annualized saving of CAD 200 million by 2022. The Financial services division also delivered 4 per cent growth to CAD 13.1 million of revenue in Q1 FY20 against the Q1 FY FY19.

Share Price Performance

Daily Chart as of 8^th May 2020, after the market closed (Source: Refinitiv, Thomson Reuters)

CTC.A’s shares closed at CAD 100.09 on 8^th May 2020, up by 7.98 per cent against the previous day closing. Stock's 52 weeks High is CAD 157.36 and Low is CAD 67.15.

Valuation Methodology

Growth Catalysts

The continuous investment in digital capabilities has the potential to deliver sustainable growth in e-commerce vertical. Further, the operational efficiency program will deliver CAD 200 million in annualised savings by 2022.

Conclusion

During the financial year 2019, both the top line and bottom-line items of the income statement shown the remarkable improvement. Prior to the wake of Covid-19 disruption in 2020, comparable sales were tracking at pace 1.3% growth against the previous year. Post that, the prevailing pandemic affected the EPS significantly in the last quarter. However, the Group has adopted several initiatives to boost up liquidity. Regarding segments, Canadian Tire division is operating with robust liquidity position and financial flexibility; CTC division has been witnessing a change in consumer behaviour with substantial growth in digital and ecommerce vertical; and, financial services division yielded 4% revenue growth in Q1 FY20 versus Q1 FY19 despite the challenging conditions. Therefore, the Group is well-positioned to compete decently in the long run.

Over the past five years (FY14 - FY19), the company’s revenue surged from CAD 12,462.9 million in FY14 to CAD 14,534.4 million in FY19. Compounded annual growth rate (CAGR) stood at 3.12 per cent.

Based on the decent prospects, which are supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of CAD 100.09 (as on 8th May 2020) with lower double-digit upside potential based 15.65x Industry NTM Average Price/Earnings (approx.) on FY20E earnings value per share (approx.). 

*All forecasted figures and peers have been taken from Refinitiv, Thomson Reuters.

*The “Buy” recommendation is also valid for the current price as covered in the report (as on 11^th May 2020).

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.