Mullen Group Ltd (TSX: MTL) supplies trucking and logistics services to the oil and natural gas industry in Canada and the United States. The company operates via two business segments: trucking/logistics and oilfield services.

Key takeaways from 3Q 2020

• The company repurchased more than 7.9 million shares in 2020 at an average price of CAD 6.7 per share under the NCIB. It reflects the confidence which management is having in their business.
• At present, the company has working capital of CAD 235.0 million which includes CAD 105.4 million of cash and cash equivalents. The company also holds an undrawn Bank Credit Facility of CAD 150.0 million.
• The company generated best-in-class operating margin, achieving record results for the quarter, and made two acquisitions during the quarter.

Financial overview of Q3 2020

Source: Company

• 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, as the company booked the lower revenues from all of the three segments: Less-Than-Truckload, Logistics & Warehousing and Specialized & Industrial Services segment due to the outbreak of the COVID-19 virus in North America resulting in business closures.
• The company posted lower operating expenses, which came down in Q3 2020 to CAD 190 million from CAD 228 million in Q3 2019.
• Net Income in the quarter increased by 28% to CAD 26.2 million compared to Net Income of CAD 20.4 million in the same period of last year.

Some Key line items reflecting the sound performance of the company.

Source: Company

Dividend

The company has declared a monthly dividend of CAD 0.03 per Share, this translates to CAD 0.09 for entire quarter. 

Risks associated in investment

The business of the company is exposed to 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): EV to Sales 

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

Stock recommendation 

Since the recovery is seen in employment statistics and job market as well as recent announcements by the Federal Government to provide financial support and stimulus, we expect that the consumer spending should remain strong as we are entering the holiday season and consumer spending is the primary demand source for the trucking and logistics industry. The company mentioned that consolidated revenue would continue to be softer than last year's levels due to the challenges facing the Alberta economy, which remains highly dependent upon the oil and natural gas industries. And from the profitability point of view, the group expect to perform at a high level providing the possibility that it will meet or exceed last year's fourth quarter results. The company is determined with total capex of CAD 50 million in FY20, under this around CAD 45 million is allocated to replace the trucks, trailers, and specialized equipment to support the operations of the business. Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 9.16 on 28 October 2020. We have considered Precision Drilling Corp, Trican Well Service Ltd, and CES Energy Solutions Corp etc. as a peer group for the comparison.

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

Canadian National Railway

Canadian National Railway (TSX: CNR) is engaged in the rail, and related transportation business with a network of approximately 20,000 route miles of track spans Canada and mid-America. It carries over 300 million tons of cargo, serving exporters, importers, retailers, farmers and manufacturers. 

Investment Rational: 

• Record movement of grains:As the economy is on recovery mode, the company moved 7.76 million metric tonnes (MMT) of grain in the third quarter of 2020. In September, the company moved more than 2.81 MMT of grains marking the seventh straight month in a row of record grain movements, supporting Canadian grain farmers and the grain supply chain.

Source: Company

• Leveraging Unique 3-Coast Advantage:We believe that the company is the only player in North America whose network is spread across the three coasts, the Atlantic, Pacific, and the Gulf of Mexico. These coasts will further provide an ample amount of business, as many ports are increasing their capacities.

• Solid Financial Health: For the period of the first nine months of 2020, the company generated Free Cash Flow of CAD 2,087 million, an increase of CAD 588 million from the prior period. With an ROE of 17.31% on LTM basis, the company is beating the industry on many other operating ratios; the matrix below gives a glimpse on this.

Source: Refinitiv (Thomson Reuters)

Financial Overview of 3Q 2020

Source: Company

• Revenues posted by the company for 3Q 2020 were CAD 3,409 million, a decrease of CAD 421 million or 11% compared to the same period last year. The reason behind this fall in revenues was mainly due to lower volumes across commodity groups caused by the ongoing effects of the COVID-19 pandemic and lower applicable fuel surcharge rates. In contrast, the revenue has shown an improvement if we compare the revenues on sequentially basis.

• Operating expenses dropped by 8% to CAD2,043 million, mainly propelled by lower fuel and labour costs, as well as decreased purchased services and material expenditure.

• The company posted Diluted earnings per share of CAD 1.38, a decrease of 17% against CAD 1.66 as compared to the previous corresponding period.

• The company paid a quarterly dividend of CAD 0.5750 per share increased by 7% from CAD 0.5375 per share on Y-o-Y basis.

Risks associated to investment

The performance of the company is subject to uncertainties, primarily from the outbreak of covid-19 pandemic, general economic and business conditions. It is also exposed to inflation, currency, and interest rate fluctuations and change in fuel price.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

During the third quarter of 2020, demand partially recovered, with sequential improvements in volumes relative to the second quarter of 2020, but overall demand remained below 2019 levels.  By the end of the third quarter of 2020, demand for certain commodities had recovered at or close to 2019 levels, including intermodal, driven by increased online consumer spending on imported goods as well as consumer staples, particularly the grocery sector, which the group was well-positioned to capitalize on, leveraging the acquisitions of TransX and H&R; and strong demand for lumber and panels used in home renovations and construction of new homes, as a result of accumulated demand during the pandemic lockdown phase in the second quarter. The company is leveraging itself on the unique 3 coast model, where the ports will be hiking the capacities.

Therefore, based on above rationales and valuation, we have given a ‘Hold’ rating to the at the closing price of 133.23 on 28 October 2020. We have considered Union Pacific Corp, Norfolk Southern Corp, and Cargojet etc., as a peer group for the comparison.

CNR daily technical 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.