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 estate 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: At the end of Q1FY21, MRC reported a decent liquidity level of CAD 562 million, which includes cash balance of CAD 121 million and CAD 441 million of funds available under revolving credit facilities. This seems sufficient to fund its near-term working capital requirements. Additionally, the management took prudent steps to retain the liquidity levels and has contracted its upcoming capital investments. In order to improve its cost structures, MRC also lowered or deferred the operating expenses, property taxes and other instalments.

• Mortgage Financing: During the month of April 2021, the company issued a mortgage financing amounting to CAD 90,000 for a tenure of four years, with an interest of 2.22%. With these funds, the group would repay its temporary line of credit amounting to CAD 50,000, which is about to mature in Q2FY21. Moreover, the company also took a credit of CAD 21,000 for a term of five years, bearing an interest rate of 2.399%. The above was taken by mortgaging two office properties located in Oakville and Ottawa.

Q1FY21 Financial Highlights:

• MRC announced its quarterly result, wherein total revenue from real estate properties reported at CAD 211.364 million, lower than CAD 228.226 million in the previous corresponding period (pcp). Revenue from hotel properties declined to CAD 22.148 million, from CAD 47.805 million in pcp.
• The group posted a slide in the net operating income at CAD 86.474 million, v/s CAD 102.601 million in Q1FY20. The decline was due to a lower topline, partially offset by a decline in property operating expenses.
• The corporation reported a decline in other revenue at CAD 13.450 million, as compared to CAD 16.239 million in pcp, due to a lower income from management and advisory fees coupled with lower interest income.
• The company reported a net profit of CAD 17.948 million, as compared to a net loss of CAD 8.870 million in the previous corresponding period, supported by a fair value gain of CAD 38.926 million v/s a fair value loss of CAD 36.822 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Reports)

Risks: Decline in fair value of properties are likely to impact the company’s bottom line. Moreover, due to a sluggish economic scenario, the company’s operations might be dampened due to lower rent collection.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock Recommendation:

In order to make timely repayment of its liabilities maturing in coming quarters, the company has issued new debt instruments. Meanwhile, the company has a diversified asset base, which would lower the company’s risk profile during economic cycles and is a key positive. As the economy coming back on track, we expect the group’s performance to improve further.

Source: Company Report

We have valued the stock using Price to Earnings-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have industry (financials) median on an NTM basis. Considering the aforesaid facts, price movements, we recommend a ‘Buy’ rating on the stock of MRC at the last closing market price of CAD 127.95 on May 12, 2021.

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

Evertz Technologies Limited

Evertz Technologies Limited (TSX: ET) is an equipment provider to the television broadcast telecommunications and media industries. The Company designs, manufacture and markets video and audio infrastructure equipment for the production, post-production and transmission of television content.

Key highlights 

• An Income Play:Despite this challenging environment, the company maintained its dividend distribution, reflecting its financial strength and suggests that the group is a friend of income investors. Recently, the company paid quarterly dividend of CAD 0.18 per share, on March 25, 2021. Moreover, at the last closing price, the stock was offering a dividend yield of ~4.89%, which looks lucrative considering the current interest rate environment.

Source: Refinitiv (Thomson Reuters)

• Improving market scenarios: The Company believes the pandemic is only temporary, since hints of change have emerged in the last two quarters. The company is well poised to benefit from a resurgence in the economy as well as the industry's shift to IP and Cloud-based solutions. Furthermore, the company would retain the financial stability needed to finance working capital requirements and investment opportunities in the near future.

• Acquired Studer’s strategic assets: HARMAN International recently sold the Studer brand, technology, and related properties to the group. Furthermore, the company would invest in Studer to create next-generation solutions that will address the potential needs of broadcast consumers, while also building synergies between its existing product suite and the Studer product ecosystem.

• Industry Beating Margins: Despite the hard time, the management’s solid determination and resilience of business helped them leaping the industry median margins on many fronts in Q3 2021, which is a key positive. The Chart below gives a glimpse of this.

Source: Refinitiv (Thomson Reuters)

Financial Overview of Q3 2021 (In thousands of CAD)

Source: Company

• In Q3 2021, the company reported revenue of CAD 92.7 million, compared to CAD 121.2 million in the previous corresponding period. The revenue decreased mainly due to travel restrictions and the postponement or cancellation of sporting and other live events and various other related projects.
• The company posted a gross margin of CAD 52.0 million compared to CAD 67.8 million in the previous corresponding period. The gross margin as a % to sales remained the same at 56%, against PCP. 
• The company’s net earnings stood at CAD 10.3 million, compared to CAD 19.4 million in Q3 2020. The decrease in net earnings was mainly due to lower revenue.

Risks associated with investment

Prolong delay in the project execution may lead to a slide in revenue, followed by a lower cash flow. Further travel bans and cancellations of sports events, other live events, and various other related projects may also lead to a fall in the Company's order book. Any continuation of such a trend would affect the Company's financial performance.

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock recommendation

The Company caters to the IT segment and offers innovative offerings across software, equipment, and technology segments. Furthermore, the IT and cloud business has grown drastically in the recent past and is expected to retain the momentum driven by a shift in business, changing consumer preferences etc. Furthermore, recently the Company received a purchase order by a Major US Broadcaster totaling over CAD21 million. Besides this, the group also offers a healthy yield and beats the industry on many fronts, which are a key positive. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 14.71 on May 12, 2021. We have considered CGI Inc, EXFO Inc, etc. as the peer group for the comparison.

1-Year Price Chart (as on May 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.