blue-chip

Two TSX Listed Stocks in the Buy Zone – L and REI.UN

Nov 18, 2020 | Team Kalkine
Two TSX Listed Stocks in the Buy Zone – L and REI.UN

 

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. Key grocery banners include Loblaws, No Frills, and Maxi, while its pharmaceutical operations are the product of its 2014 acquisition of Shoppers Drug Mart.

Key Highlights:

  • Reaping reward from digital investment: The Company's investments in its Everyday Digital platforms enable it to offer Canadians a choice of shopping in-store or online with either home delivery or convenient pickup locations. The Company's e-commerce sales grew by 175% in the third quarter, across the Company's grocery, pharmacy, and apparel e-commerce platforms.
  • Strategic growth initiatives: In September, the Company made two important announcements in its strategic growth areas of Payments and Rewards and Connected Health. The Company launched the PC Money TM 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.
  • Ample Liquidity: At the end of the third quarter, the Company's consolidated cash and short-term investments balance was CAD 1.8 billion. The aggregate available liquidity was approximately CAD 3.8 billion including undrawn amounts under committed credit facilities.

Key Takeaways from Q3FY20 results:

  • The company declared its quarterly results, wherein the company posted an impressive 6.9% y-o-y revenue growth at CAD 15,671 million. The company derives its majority revenue from Retail segment, which grew 7.2%, driven by positive momentum from same-store sales growth and a net increase in retail square footage. However, the positives were partially suppressed by a slide in Financial Services segment sales amounting CAD 31 million, primarily attributable to a lower interest and lower customer spending.
  • Adjusted EBITDA stood at CAD 1,524 million, reflects a marginal increase of 2.1% on y-o-y basis. On the flip side, the adjusted EBITDA margin fell to 9.7%, as compared to 10.2%. The decline was due to an increase in Cost of merchandise inventories sold and Selling, general and administrative expenses.

                 

                       

                                         

Source: Company Reports

  • The company reported its net earnings at CAD 360 million, as compared to CAD 353 million in the previous corresponding period (pcp).                 

                       

Q3FY20 Income Statement Highlights (Source: Company Reports)

  • The company posted its Cash and cash equivalents of CAD 1,499 million, while total assets stood at CAD 35,868 million.

Risks: Lower consumer spending, coupled with a decline in the traffic, might act as a drag for the company, which would dampen the overall performance of the company.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

The company caters to the retail consumers, and the demand is likely to remain strong due to the demand dynamics within the retail segment, which is a key positive and would support the future income. Loblaw continued to make investments to enhance the overall value proposition for consumers, maintaining its promotional intensity through the pandemic to retain its share gains in conventional banners and further improve its positioning in discount banners. We have valued the stock using Price to CF 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 etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 65.17 on November 17, 2020.

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

 

Riocan Real Estate Investment

Riocan Real Estate Investment Trust (TSX: REI) is a Canadian real estate investment trust which owns, develops, and operates Canada's portfolio of retail-focused, increasingly mixed-use properties. 

Recent Developments

  • The company announced a monthly distribution of 12 cents per unit, payable on December 07, 2020, to unitholders of record as at November 30, 2020.
  • Recently, the company announced the sale of its 50% non-managing interest in eCentral™, and ePlace™, located in Toronto, to its current partner on other projects, Woodbourne Capital Management. The total sale price is settled at CAD 150.8 million.

Key Highlights:

  • An Income Play: At the last closing price, its shares are offering a lucrative dividend yield of 8.32%, which is gigantically higher, given the lower interest rate environment. Further, the company has a track record of dividend payment over the past 10-year.

Dividend History. Source: Refinitiv (Thomson Reuters)

  • Diversified Revenue Base: The company has diversified revenue base from traditional income stream to mixed-use developments, which would expand its exposure to office and residential NOI. Furthermore, the company has marked its presence across third-party fees through leveraging its segmental expertise.
  • Strong Pipeline: The company has a strong product pipeline, which is entirely located in Canada’s six major markets and ~99% of projects are mixed-use residential projects. The corporation estimates ~42 million square-feet of upcoming projects in the foreseeable future.

                                    

                     

Product Pipeline (Source: Company Presentations)

Q3FY20 Financial Highlights:

  • REI announced its third quarter results, wherein the company posted revenue of CAD 302.335 million, as compared to CAD 353.877 million in the previous corresponding period (pcp). The decline was majorly attributable to a drastic fall in Residential inventory sales segment (CAD 28.491 million versus CAD 73.767 million in Q3FY19).
  • Total operating costs stood at CAD 126.499 million, significantly lower than CAD 161.117 million in the previous corresponding period (pcp).
  • Operating income stood at CAD 175.836 million, lower than CAD 192.760 million in Q3FY19, due to lower income partially supported by lower operating expenses.
  • Net income stood at CAD 117.559 million, as compared to CAD 177.554 million in the previous corresponding period.
  • The company ended the quarter with cash and cash equivalent of CAD 59.930 million, while total assets stood at CAD 15,127.844 million.
  • The group reported improved rent collection of ~94% in Q3FY20, higher from ~91% in Q3FY19, which is commendable, given the challenging environment.

                  

                                                       

Source: Company Presentation                   

                            

Q3FY20 Income Statement Highlights (Source: Company Reports) 

Risks: The company might witness a fall in rent collection due to a decline in the consumer income on account of COVID-19 pandemic. Furthermore, traction for the value-added services might decline due to the lower demand scenario.

Valuation Methodology (Illustrative): Price to Earnings based

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

Stock Recommendation:

The company’s shared recorded a crossover on the daily price chart, with price closes above its crucial resistance level of 200-day SMA, which is a bullish technical indicator. Further, in the last two trading sessions, its shares managed to trade above its long-term resistance, which implies that stock has created a new strong support level.  Also, the stock is yielding gigantically higher with a dividend yield of 8.3%. Further, the company reported solid liquidity of CAD 803 million, which seems sufficient to surpass the current challenging environment.

Therefore, based on the above rationale, technical strength in the stock and valuation, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 17.30 on November 17, 2020. We have considered peers like SmartCentres Real Estate Investment Trust, SmartCentres Real Estate Investment Trust etc.

1-Year Daily Price Chart (as on November 17, 2020, after the market close). Source: Refinitiv (Thomson Reuters)


Disclaimer

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