Labrador Iron Ore Royalty Corporation

Labrador Iron Ore Royalty Corporation (TSX: LIF) is a Canadian corporation, which derives its revenue from its equity investment in Iron Ore Company of Canada, (IOC) and its IOC royalty and commission interests.

Key Highlights:

• Consistent Dividend Payment: The company has a strong history of regular dividend payment, across economic cycles, which is impressive and indicates stable operational performance over the years. During 9MFY20, the company distributed CAD 118.400 million as a dividend, compared to CAD 163.200 million, a year ago. At the last closing price, the stock was offering a decent dividend yield of ~4.163% amid a low interest rate environment.
• Positive Outlook: Despite a challenging economic scenario, the company’s sales volumes and production levels stood in line with the target, which is impressive. During the third quarter of FY20, the company reported signs of recovery aided by improved pellet demand from Europe. Moreover, IOC increased its pellet production levels by operating five out of six lines in the pellet plant and is planning to bring back the sixth line before the end of FY20, which is a key positive.

Q3FY20 Financial Highlights:

• LIF announced its third quarter results, wherein the company posted revenue of CAD 52.860 million, as compared to CAD 46.186 million in the previous corresponding period (pcp). The increase was driven by higher IOC royalties a result of higher realized iron ore prices and marginally higher sales tonnage. 
• Total expenses stood higher at CAD 12.839 million, versus CAD 11.547 million in Q3FY19, due to higher royalty taxes and amortization expenses.
• Income Before income taxes stood higher at CAD 74.915 million, as compared to CAD 66.641 million in pcp.
• The company reported its net income at CAD 57.728 million, slightly higher from CAD 57.471 million, a year ago, supported by a higher income before income taxes while a higher income taxes stood as a drag.
• The company reported its cash and short-term investments of CAD 18.810 million, while total Assets stood at CAD 782.330 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company’s revenue is correlated to the demand and prices of iron ore. Any event which may impact the demand or price of iron ore is likely to affect the group’s performance adversely.

Valuation Methodology (Illustrative): P/E based valuation

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

Stock Recommendation: The group performance has been supported by elevated iron ore prices driven by higher demand from China and IOC remains well positioned to benefit from its royalty and equity investments in IOC given strong iron ore market conditions and current production levels.  The revenue of the group is directly co-related with the international prices of iron ore and the recent surge in commodity prices has resulted in positive investor’s sentiment on the stock. We expect the iron ore prices to remain elevated on account of an increase in demand from China, followed by supply constraints. LIORC’s Royalty structure allows it to continue to receive cash flows regardless of the economic environment as IOC has operated for over 50 years without a shut down due to market conditions. With IOC’s long mine life and LIORC’s recent renewal of its mining leases for another 30 years, shareholders can expect cash flows to continue well into the future. We have valued the stock using P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered Industry (Basic materials) on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 24.31 on November 20, 2020.

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

Morneau Shepell Inc.

Morneau Shepell Inc. (TSX: MSI) is a human resources company that provides consulting and administrative services in four segments: well-being, administrative outsourcing, consulting, and absence management. 

Recent Updates:

• The company declared a monthly cash dividend of CAD 0.065 per share, payable on December 15, 2020.
• Canadian insurance provider GMS Health and Travel Insurance (GMS) today announced it is providing LifeWorks by Morneau Shepell, a total wellbeing solution, to all GMS Personal Health customers as part of their coverage.

Key Highlights:

• Balanced Portfolio: The company’s business is not concentrated within a specific line of business or geography and hence provide a well-balanced portfolio. This would safeguard the company’s business across economic cycles.           

Q2FY20 Segment Highlights (Source: Company Reports)

• Elevated Recurring Revenue: The company has reported an increase in its recurring revenue over the years, which is a key positive and indicates higher traction from the existing clients.

Source: Company Reports

Q3FY20 Income Statement Highlights:

• Operating revenue stood at CAD 240.300 million, as compared to CAD 223.980 million in pcp. The increase was driven by significantly higher income from United States and International businesses, while a slide in income from Canada segment remained a drag.
• The quarter was marked by higher salaries, benefits and contractors and inclusion of sublease loss provision amounting CAD 10.300 million, which has resulted in an increase in total operating expenses to CAD 235.931 million, as compared to CAD 213.050 million in the previous corresponding period (pcp).
• Loss before income taxes stood at CAD 1.929 million, as compared to a profit of CAD 2.558 million in Q3FY19.
• The company posted a net loss of CAD 2.069 million, as compared to a net profit of CAD 1.332 million in the previous corresponding period.
• The company reported a cash balance of CAD 5.419 million, while total assets stood at CAD 1,542.080 million.       

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The performance of the company relies on information systems and technology and client-relationships. The entry of new players might result in pricing pressure or loss of clients.

Valuation Methodology (Illustrative): EV to Sales based

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

Stock Recommendation:

The company showed an improved top-line in Q3FY20 driven by the recent acquisition Mercer, and with the improved acceptability of the products, MSI is likely to retain the momentum in the coming days. The company has expanded into the rapidly growing telemedicine market to provide the employees of Canadian clients and their families with easier, more convenient access to digital health care services. To access this market opportunity, the company is launching a unified telemedicine service through its LifeWorks' business to provide Canadians with quick access to medical practitioners such as doctors, nurse practitioners, and other clinical professionals across the well-being spectrum.

We have valued the stock using EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Fiera Capital Corp, Genworth MI Canada Inc and AGF Management Ltd. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 29.45 on November 20, 2020.

MSI 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.