Fortis Inc.

Fortis Inc. (TSX: FTS) owns and operates utility transmission and distribution assets across North America and serves more than 2.5 million electricity and gas customers. Meanwhile, the company has smaller stakes in electricity generation and several Caribbean utilities. 

Key Updates:

• An income play: Historically, the company reported a consistent dividend payment, supported by stable cash flow generation. Moreover, FTS reported an increase in its dividend payout ratio in the recent past, which is encouraging. During FY20, the company paid CAD 786 million to its equity shareholders, significantly higher than CAD 494 million in FY19. At the last closing price, the FTS stock was offering a dividend yield of 3.69%, which is decent considering the current interest rate scenario.              

Dividend History (Source: Company Report)

• Positive Long-term Outlook: The company caters to the utility segment, which is immune to the economic cycles. According to the Management, the rate base is expected to grow steadily at a CAGR of ~6% uring FY21 to FY25 to CAD 3 Billion. Rate base is the value of the property upon which public utility is allowed to earn a specific rate of return by the regulatory bodies. A higher rate base usually denotes a healthy business prospect for the firm. Moreover, the company is planning to invest CAD 19.6 billion, majorly across its regulated assets, and ~61% of the total investment is expected to be funded by the company’s cash flows.

Source: Company Presentation

• Robust margin profile: The group reported solid margins profile during Q4FY20, which was higher than the industry median. The company implemented several cost control synergies and reported EBITDA margin and operating margin at 42.5% and 27.7%, respectively, compared to the industry median of 34.3% and 22.5%, respectively. Meanwhile, the group reported a net margin of 16%, slightly higher than the industry median of 15.1%.
• Event Updates: The company would disclose its first quarter FY21 financial results on May 5, 2021.

FY20 Financial Highlights:

• FTS announced its full-year result, wherein the company posted revenue of CAD 8,935 million v/s CAD 8,783 million in FY19. The period witnessed a surge in income from the contracted revenue supported by 8% y-o-y growth in the Rate Base.                

Source: Company Presentation

• Total expenses increased to CAD 6,427 million, from CAD 6,322 million in FY19, primarily due to an increase in depreciation and amortization costs (CAD 1,428 million v/s CAD 1,350 million in the previous year).
• Operating income slide to CAD 2,508 million from CAD 3,038 million in FY19, due to increase in total expense and a Gain on disposition amounting to CAD 577 million in FY19.
• Net earnings stood at CAD 1,389 million v/s CAD 1,852 million in FY19.
• Cash and cash equivalents were reported at CAD 249 million, while total assets stood at CAD 55,481 million.

FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology (Illustrative): EV to EBITDA

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

Risks: The group derives its majority revenue from regulated assets, and due to any strict regulatory norms, the company’s overall performance might get hindered and would take a toll on the existing growth profile.

Stock Recommendation:

During, FY20 the company issued ~CAD 3.5 billion in long-term debt, while it reported an available credit facility of ~CAD 4.3 billion, which seems sufficient to meet its working capital and capital investment. Moreover, the company’s focused on implementing control costs synergies during the pandemic, which helped the company to retain a stable cash flow and earnings. Notably, ~83% of the Corporation's revenues derived from residential sales, which have remained elevated in the recent past due to an increased adaptation of work-from-home option. We have valued the stock using the EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers TC Energy Corp, Hydro One Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of FTS at the closing price of CAD 54.74 on April 12, 2021.

One-Year Price Chart (as on April 12, 2021). Source: Refinitiv (Thomson Reuters)

Morguard Corporation

Morguard Corporation (TSX: MRC) is a real estate company that acquires, owns, and develops properties in Canada and the United States. The group operates through three business segments, namely investments in real property, ownership in real estate investment trusts (including Morguard REIT and Morguard North American Residential REIT), and real estate advisory services and portfolio management.

Key Highlights

• Ample liquidity with prudent capital management: The company has an impressive liquidity level of CAD 564 million, which includes CAD 142 million of cash balance and CAD 422 million under revolving credit facilities. The above is sufficient to fund its near-term working capital needs and capital expenditures. Moreover, the company has ~CAD 1,315 million of unencumbered income and other investments options that could be used for financing. 

• Balanced Portfolio: The company operates through diversified asset portfolio and has healthy, conservative debt ratios and financial resources, which provides strength against economic and real estate cycles. Moreover, the company has beautifully allocated its asset class primarily among retail, residential and office segments, which would diversify the risk profile. Also, in terms of Geographic allocation, the group has an equal allocation across the US and Canada regions.          

Source: Company Presentation

FY20 Financial Highlights:

• MRC announced its full-year result, wherein the total revenue was reported at CAD 1,044.189 million, lower than CAD 1,189.173 million in FY19. The decline was primarily due to a steep decline in hotel revenues (CAD 98.046 million v/s CAD 245.282 million in pcp) which was primarily due to the social distancing measures combined with travel restrictions.
• The corporation posted a slide in the net operating income at CAD 491.243 million, as compared to CAD 556.181 million in FY19. The decline was due to a lower topline, coupled with higher property operating expenses.
• The company reported a net loss of CAD 98.918 million, as compared to a net profit of CAD 186.939 million in the previous year.
• The company reported a cash balance of CAD 142.088 million, while total assets were recorded at CAD 11,052.688 million.

FY20 Income Statement Highlights (Source: Company Report)

Risks: Decline in the rent collection due to imposition of a further travel restriction would dampen the company’s overall performance.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock Recommendation:

In the recent past, the group has cut down its capital expenditures to ensure ample liquidity, which is a key positive. The management has also implemented various initiatives to reduce its operating expenses, property tax instalments, hydro payments and corporate income tax instalments, which is impressive. Moreover, apart from accumulating high-quality real estate assets, the company also invests in fixed income and equity segments in order to mitigate the risk of uncertainty and reducing rent collection during the economic cycles.

Source: Company Report

We have valued the stock using Price to Earnings-based relative valuation method and have arrived at a lower-double-digit upside (in percentage terms). For the said purposes, we have considered peers like Five Point Holdings LLC, Mainstreet Equity Corp etc. Considering the aforesaid facts, price movements, we recommend a ‘Buy’ rating on the stock of MRC at the closing market price of CAD 118.99 on April 12, 2021.

One-year Price Chart (as on April 12, 2021). 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.