Canadian National Railway Company

Canadian National Railway Company (TSX: CNR) is engaged in the transportation business and transports more natural resources, manufactured products, and finished goods throughout North America every year.

Key Highlights:

• Record shipping over 2.95 MMT: The group reported strong performance during the month of January 2021, and posted a new record by shipping over 2.95 million metric tonnes (MMT) of Canadian grain and processed grain products via carload, reflecting an increase of 27% on y-o-y. Moreover, the above shipment was 32% higher than the three-year average of 2.24 MMT. The increased amount of goods is primarily supported by the investments in capacity done within the railroad during the past few years.

• Better than Industry margin: The performance of the group stood significantly better than the industry, which shows strong operational efficiency. During Q4FY20, the company reported gross margin, EBITDA margin and operating margin at 76.3%, 49.6% and 38.6%, respectively, as compared to the industry median of 54.2%, 21.4% and 10.5%, respectively. Moreover, the net margin stood at 27.9%, as compared to the industry median of 8.6%. 

• Solid growth in Free Cash flows: The group reported strong growth in the free cash flows at CAD 3,227 million in FY20, reflecting an increase of 62%, driven by improved working capital management.

Q4FY20 Financial Highlights:

• CNR announced its quarterly results, wherein the group posted revenue of CAD 3,656 million, as compared to CAD 3,584 million in the previous corresponding period (pcp). The increase was driven by 9% y-o-y growth in the workload at 125.3 Gross metric tonnes (GMTs).

Source: Company Presentation

• Total operating expenses stood at CAD 2,245 million, lower than CAD 2,366 million in pcp, supported by a lower fuel cost (CAD 303 million versus CAD 406 million in pcp). Operating income stood at CAD 1,411 million, versus CAD 1,218 million in pcp.
• The company reported tremendous growth in the bottom-line at CAD 1,021 million, significantly higher than CAD 873 million in pcp.
• Cash and cash equivalents stood at CAD 569 million, while total assets were recorded at CAD 44,804 million.

Q4FY20 Income Statement Highlights (Source: Company Reports)

Risks: Rise in costs due to an increase in labor costs and fuel cost might affect the overall profitability.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

The group reported sequential growth in revenue, operating income and in net profit at CAD 3,656 million, CAD 1,411 million and CAD 1,021 million, respectively, as compared to CAD 2,656 million, CAD 1,366 million and CAD 985 million in Q3FY20, which indicates improved performance. Within the industrial segment, the group expects continuing strength in home renovation segment and housing market that would further drive the lumber and panel demand, which augurs well for improved shipping activities. The Canadian coal segment is likely to remain strong, driven by Teck contract to start in April 2021. Moreover, the company’s shipment is likely to be supported by higher traction from the grocery segment with refrigerated products and strong positioning with TransX suite of products. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Canadian Pacific Railway Ltd, Union Pacific Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 135.38 on February 8, 2021.

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

Mullen Group Ltd

Mullen Group Ltd (TSX: MTL), is a Canada-based company which supplies trucking and logistics services in Canada. The Company provides a range of specialized transportation and related services to the oil and natural gas industry in western Canada. It operates through three segments: Less-Than-Truckload, Logistics & Warehousing and Specialized & Industrial Services. 

Key highlights 

• Event update: The company intends to release its 2020 Year-End and Fourth Quarter earnings results after market close on Wednesday, February 10, 2021.

• Management’s guidance: For FY 2021 the management expects to generate a revenue of CAD 1.2 to CAD 1.3 billion, with the operating earnings of CAD 200 to CAD 220 million, respectively.

• An Income play: Recently, the company announced a monthly dividend of CAD 0.04 per Common share, payable on February 16, 2021. Moreover, the stock carries an attractive dividend yield of 4.3%, which is quite impressive for the investors with a long-term horizon amid the low interest rate environment.

• Shares buyback: As of September 30, 2020, the company had acquired the maximum shares allowed for the year. They acquired 8 million common shares at an average price of CAD 6.7. Furthermore, the board would consider reinstating a share buyback program in 2021; this reflects the confidence of the management in the business.

Financial overview of Q3 2020

Source: Company 

• In Q3 2020, the company generated consolidated revenue of CAD 290.9 million, down by CAD 34.4 million, or 10.6%, compared to CAD 325.3 million in 3Q 2019, primarily due to lower revenues from all the three segments on account of the COVID-19 virus, resulting in business closures.

Source: Company

• On the back of lower direct operating expenses and lower S&A expenses in Q3 2020, the company managed to report higher operating income before depreciation, which stood at CAD 65.2 million against CAD 55.6 million in the previous corresponding period.

• In Q3 2020, net income increased by 28% to CAD 26.2 million, against CAD 20.4 million in the previous corresponding period. 

Risks associated with investment

The business of the company is under many risks which can change the picture of their operations and financial health. Some of these risks can be classified as general economy risk, hike in fuel costs, fluctuation in foreign exchange rates, e-commerce and supply chain evolution, etc. 

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

From an economic perspective, the recovery has been impressive, although certain sectors of the economy continue to be negatively impacted by shifts in consumer preferences and demand. Nevertheless, with the support of government spending, stimulus packages and the reopening of many businesses, overall consumer spending continued to improve during the quarter. The company also benefitted from the economic recovery as it witnessed a recovery in revenue on a sequential basis, although parts of the business remain challenged. The company generated best in class operating margins, made two acquisitions during the quarter and used the strong balance sheet to buyback approximately 8 million common shares. Furthermore, for FY2021, the group expects to clock a revenue of CAD 1.2 to CAD 1.3 billion, with operating earnings of CAD 200 to CAD 220 million is a key positive. Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 11.17 on February 8, 2021. We have considered Halliburton Co, TFI International Inc, Secure Energy Services Inc, etc. as the peer group for the comparison. 

Source: Refinitiv (Thomson Reuters)

Disclaimer

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