Loblaw Companies Limited

Loblaw Companies Limited (TSX: L) is one of Canada's largest grocery, pharmacy, and general merchandise retailers. It operates the most expansive store footprint in Ontario and maintains sizable presences in provinces like Quebec and British Columbia. The company has grocery banners like Loblaws, No Frills, and Maxi etc.

Key Updates:

• The organization would purchase 3,269,208 common-shares of Loblaw Companies Limited (own company) from Mr. Weston, as the later would dispose of its holding as part of an internal reorganization.
• Earlier, the company announced the acquisition of technology and the related team from Eyereturn Marketing Inc., a subsidiary of Torstar Corporation. The transaction would likely to strengthens the company’s media segment, which includes full-service digital marketing agency. With the above acquisition, the group would focus on several campaigns with meaningful insights, which would help the brand to reach to the targeted customer.
• The Company launched the PC Money Account, a simple no-fee way to do everyday banking, turning the act of paying bills and shopping into a way to receive PC Optimum rewards. The Company also announced an investment in Maple Corporation and the launch of a PC Health app. Together, these two initiatives form part of the Company's next-generation digital health platform that will provide Canadians with a new, personalized healthcare experience.

Q3FY20 Financial Highlights:

• The company announced its quarterly results, wherein the company posted revenue of CAD 15,671 million, as compared to CAD 14,655 million in the previous corresponding period (pcp). The increase was driven by a higher income from food retail (CAD 11,215 million versus CAD 10,423 million in pcp) and a higher income from drug retail (CAD 4,249 million versus CAD 3,997 million).
• Operating income stood at CAD 718 million, stood higher from CAD 690 million in Q3FY19. The increase was driven by higher revenue, partially offset by an increase in the cost of merchandise inventories sold (CAD 10,982 million versus CAD 10,204 million in pcp).
• Adjusted EBITDA stood at CAD 1,524 million, as compared to CAD 1,492 million in the previous corresponding period, while adjusted EBITDA margin slide to 9.7% versus 10.2% in pcp.
• The company reported net earnings available to common shareholders at CAD 342 million versus CAD 331 million in pcp.
• The company reported a cash balance of CAD 1,499 million, while total assets were reported at CAD 35,868 million.                        

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Lower consumer spending due to the extension of COVID 19 pandemic, combined with a decline in the traffic could dampen the overall performance of the company.

Valuation Methodology (Illustrative): EV to Sales based

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

Stock Recommendation:

The group caters to the retail consumers, and the demand is likely to remain stable due to the strong demand dynamics within the retail segment, which is a key positive. The group invested in Everyday Digital platforms, which enables the customer to shop from in-store or online through home delivery or convenient pickup locations. Moreover, the company’s e-commerce is gaining momentum, which grew 175% in Q3FY20, while we expect the momentum to continue in the foreseeable future. The company recently launched its PC Health app, which would provide next-generation digital health platform personalized healthcare experience by leveraging the group’s existing national healthcare network, extensive professional care services and world-class loyalty program. We have valued the stock using EV to sales-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Metro Inc, Alimentation Couche-Tard Inc and George Weston Ltd etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 64.06 on January 12, 2021.

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

Real Matters Inc

Real Matters Inc (TSX: REAL) is a Canadian network management services provider for the mortgage lending and insurance industries. The Company helps its clients make intelligent decisions about real estate by leveraging technology to deliver better quality, transparency and efficiency.

Key highlights

• Achieved Fiscal 2021 targets before time:At the end of fiscal 2020, the Company remained focused and reached or surpassed three of its four fiscal 2021 targets, which is impressive. These accomplishments reflect how prudently the Company is managing its operations. 

Source: Company

• The management laid 2025 Performance Targets:The company is setting the following new targets through the end of fiscal 2025. These targets include a bifurcation of U.S. Appraisal market share between purchase and refinance and a refinance only target for U.S. Title, as the purchase and refinance markets each have distinct market factors that drive growth.

Source: Company

• S Appraisal segment is the most significant contributor in revenues:More than 62% of revenue is derived from this segment. The company witnessed higher market volumes and new client additions in this segment, resulting in Net Revenue and Adjusted EBITDA margin expansion. Since 2017, Net Revenue grew at a CAGR of 26.2% and Adjusted EBITDA recorded a CAGR of 90.8%, compared to estimated market volumes that increased at a CAGR of 2.6% only.

Source: Company

• Repurchasing Shares: The Company purchased 50 thousand shares under normal course issuer bid (“NCIB”) at the cost of USD 0.91 million. Subsequent to quarter-end, the group purchased 518,000 shares at the price of approximately CAD 11.9 million. It shows the confidence and optimism of management in their business.

Financial overview of Q4 2020 (In USD)

Source: Company 

• In Q4 2020, the Company posted consolidated revenue of USD 124.4 million, increased by 16%, compared to USD 107.3 million in the previous corresponding period, primarily due to rise in market share, new client additions and higher market volumes.

• As a result of strong operating performance, consolidated adjusted EBITDA rose to USD 22.2 million, increased by 57.5%, as compared to USD14.1 million in Q4 2019.

• Net income reported by the company in Q4 2020, stood at USD 12.7 million, increased by 59%, compared to USD 8 million in the previous corresponding period. The increase was primarily due to higher Adjusted EBITDA contributions from all three operating segments, market share gains, new client additions and higher market volumes.

Risks associated with investment

Residential mortgage volume in North America is a crucial driver for the Company's financial performance, and cyclical trends and seasonality influence this. There are many other risks which can affect the group's business and financial performances. Some of them can be classified as interest rates, refinancing rates, lenders' capacity to underwrite mortgages, house prices, housing stock supply and demand, etc. 

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock recommendation

The Company registered higher market volumes and new client additions in its U.S. Appraisal segment, which resulted in Net Revenue and Adjusted EBITDA margin expansion. It is also targeting to double the market share of the U.S. Appraisal segment by FY2025 from current levels. The Company is continuously buying its share under NCIB; showcasing the confidence and optimism of management in their business and ending the quarter with cash and cash equivalents of USD 129.2 million. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 19.07 on January 12, 2021. We have considered CGI Inc, Descartes Systems Group Inc, Open Text Corp, etc., as the peer group.

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.