Equitable Group Inc.

Equitable Group Inc. (TSX: EQB) is engaged in the financial services business, operating through its wholly owned subsidiary, Equitable Bank. It serves retail and commercial customers across Canada with a range of savings solutions and lending products, offered under the Equitable Bank and EQ Bank brands. 

Key highlights

• Solid deposit growth via digital channel: During the quarter, the group witnessed robust traction to EQ Bank's digital banking services which drove deposits for the digital platform to CAD 4.3 billion. Monthly average of account openings for the third quarter was over three times the average of 12 months before the COVID-19 pandemic.
• Decent financial performance:The organization has delivered a robust performance in Q3 2020 on many fronts. The group reported an increase in net interest income and other vital ratios also improved along with EPS and RoE on a sequential basis. 

Source: Company Presentation

• Strong Balance Sheet: The group’s balance sheet remained strong with CET 1 ratio stood at 14.3%, which is relatively higher compared to the average of other Canadian Banks. The strong balance sheet would help the group expand its asset base, which would result in better financial performance.

Source: Company presentation

Financial overview of Q3 2020

Source: Company

• The interest income posted by the group was down by merely 1.7% to CAD 278 million in Q3 2020 as against CAD 283 million in the previous corresponding period. Commercial loans and investments performed well in the period and registered growth.
• Driven by lower interest expenses, the group posted a healthy Net Interest Income (NII), up 8% on Y-o-Y basis to CAD 127 million in Q3 2020.
• Net income to common shareholders increased 35.5% to CAD 73 million in Q3 2020, as against CAD 54 million in the previous corresponding period. The growth was driven by a Lower provision and a net gain on the investments.
• The Company declared a dividend of CAD 0.37 per common share, payable on December 31, 2020, to common shareholders with a record date of December 15, 2020.

Risk associated with investment

The group might witness a rise in the provision for credit losses due to the challenging macro scenario. Further, lower interest rate might put pressure on the bank’s margin.

Valuation Methodology (Illustrative): Price to Book Value

All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation 

During the quarter, the customer base substantially increased using the bank's digital banking services. The bank also witnessed the pace in monthly average of account openings in the current quarter, which was three times the average of twelve months before the COVID-19. Substantial operating performance, rise in NII and drop in provisions, gave the robust quarterly earnings. In Q3 2020, the bank's liquid assets were CAD 2.8 billion or 9.1% of total assets compared to CAD 1.4 billion or 5.2% in the previous corresponding quarter. CET1 Capital Ratio of 14.3%, which is way above the industry average reflects the balance sheet strength. Going forward, we expect the bank's digital platform to continue to gain traction. Therefore, based on the above rationale and valuation, we have given a 'Buy' rating at the closing price of CAD 90.07 on 3rd November 2020. We have considered Home Capital Group Inc, South State Corp, First National Financial Corp etc. as the peer group for the comparison.

1-Year Price Chart (as on November 03, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

Suncor Energy

Suncor Energy (TSX: SU) is one of the largest integrated energy companies in Canada. The Group operates in western Canada, East Coast Canada, the United States, and the North Sea. The company holds ~7.4 billion barrels of proven and probable crude oil reserves. The Group operates across four major segments, namely oil sands, exploration & production, refining and marketing and corporate & eliminations.

Key highlights:

• Investment in technology: The company is accelerating its investment across technology-based infrastructure, in order to stay competitive within the segment. As per the recent trend, most of the businesses are adopting digital transmission in order to enhance their business prospects. Hence, higher involvement of technology like advanced process analytics, robotic process automation, rotating equipment sensoring & remote monitoring, etc. are likely to drive operational efficiency through cost-reductions.                             

Recent Investment Trends (Source: Company Reports)

• Ample Liquidity: The company has reported a liquidity of ~CAD 9 billion, which included cash and cash equivalents of ~CAD 1.5 billion and ~CAD 7.1 billion of available credit facilities at the end of Q3FY20. The increase in liquidity was primarily due to an additional CAD 2.8 billion of credit facilities secured in FY20. The current liquidity seems sufficient enough to pass through the challenging operating environment. Further, the company has a manageable debt maturity for the coming years, which is a key positive.

Debt maturity profile (Source: Company Reports)

Q3FY20 Financial Highlights:

• SU reported its third quarter FY20 revenue at CAD 6,457 million, significantly lower than CAD 9,896 million in Q3FY19. The decline was primarily attributable to a fall in production at 616,200 boe/day during the third quarter of FY20, as compared to 762,300 boe/day in the previous corresponding period (pcp).
• Funds from operation were recorded at CAD 1.166 billion, representing CAD 0.76 per common share in Q3FY20, against CAD 488 million, representing CAD 0.32 per common share in Q2FY20.
• Operating loss, during the period, stood at CAD 302 million, as compared to an operating profit of CAD 1.114 billion in the previous corresponding period (pcp).
• The company reported a net loss of CAD 12 million in Q3FY20, as compared to the net earnings of CAD 1.035 billion in Q3FY19.                           

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Further breakout of COVID-19 may dampen the demand for crude oil, which might create volatility in international crude oil prices. Any such scenario would affect the realization price of the group.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation: The company continued to reduce operating and capital costs in the third quarter of 2020 relative to the prior year quarter and remains on track to achieve its previously announced CAD 1 billion operating cost reduction target and CAD 1.9 billion capital cost reduction target. The company continues to execute on its plan to add sustainable annual free funds flow so that it can follow its capital allocation framework with a combination of future debt repayments, increasing shareholder returns and measured investments in economic projects. Further, at the last traded price, the stock was offering a dividend yield of 5.37%, which is lucrative considering the current interest rate environment. We have valued the stock using Price to CF value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Imperial Oil Ltd, Exxon Mobil Corp, Royal Dutch Shell PLC etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 15.65 on November 3, 2020.

SU 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.