Metro Inc.

Metro Inc. (TSX: MRU) is a retailer, franchisor, distributor, and manufacturer of food and pharmaceutical products. The company operates through a network of 650 drugstores and 950 food stores across Canada.

Key Updates:

• Stable Dividend Payment amidst Tumultuous times: For the six-month ended March 13, 2021, the company distributed higher dividend to its shareholders despite a challenging operating environment. This reflects a stable cash flow generation and operational resiliency. Operating cash flows during H1FY21 stood at CAD 650.3 million v/s CAD 544.9 million in H1FY20. Moreover, the company has an impressive history of dividend payment during the last five years, which is a key positive. Notably, the company announced a total dividend of CAD 118.1 million in H1FY21, higher than CAD 107.7 million in pcp.

Five Years Dividend History : Refinitiv (Thomson Reuters)

• Margin Surpasses Industry Median: The company reported a better margin profile versus the industry median, which states that the company is performing better than the industry. In Q2FY21, EBITDA margin and operating margin stood at 9.4% and 6.8%, respectively, higher than the industry median of 5.10% and 3.5%, respectively. Moreover, the company reported its net margin at 4.5% in Q2FY21, higher than the industry median of 1.90%.              

Source: Refinitiv (Thomson Reuters)

Q2FY21 Financial Highlights:

• MRU announced its quarterly result, wherein the company posted sales of CAD 4,193 million, up 5.1% on y-o-y basis. The company reported a 5.5% growth in same-store sales, while the company’s Online food sales increased ~ 240% from the previous corresponding quarter.
• Operating income before depreciation and amortization stood at CAD 396.1 million, higher than CAD 374.1 million in pcp. The increase was due to a higher income, partially offset by a higher cost of sales and operating expenses (CAD 3,796.9 million v/s CAD 3,614.8 million in pcp). The company reported higher wages and fringe benefits (CAD 229.6 million v/s CAD 208.3 million in pcp) and increase rents and occupancy charges (CAD 70.3 million v/s CAD 64.3 million in pcp).
• Net earnings stood higher at CAD 188.1 million v/s CAD 176.2 million in pcp.
• The company reported cash and cash equivalent of CAD 324.7 million, while total assets were recorded at CAD 13,278.2 million.            

Q2 FY21 Income Statement Highlights (Source: Company Report)

Risks: Due to the ongoing COVID 19 pandemics, the operations remained under the scanner. Any further restriction imposed by the Federal Government might lead to a change in the buying pattern of the consumers, which may affect the company’s financial performance.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock Recommendation:

For FY21, the company, expects to maintain the growth momentum within the prescription drugs segment, while the food segment to remain strong in FY21, which is likely to drive revenue. The company has been able to strategize as per the changing preference of the consumers, and offered online service to the consumers, and reported solid growth from the segment in the recent past. Further, we expect this trend to continue in the coming days driven by the changing consumer preferences. Moreover, the company reported its debt at CAD 2,317 million, reflecting an 11% decline on y-o-y basis. A lower debt indicates higher financial flexibility. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like George Weston Ltd, Alimentation Couche-Tard Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 56.54 on May 05, 2021.

One-Year Price Chart (as on May 05, 2021). Source: Refinitiv (Thomson Reuters)

Winpak Ltd

Winpak Ltd (TSX: WPK) manufactures and sells a wide range of packaging materials utilized for foods, beverages, and healthcare applications.

Key Highlights:

• Strategic Alliance with Wipak: The deepens its strategic alliance with Wipak, which is a European sister company of Winpak and is a leading producers of packaging materials and solutions for the Food and Medical supply industries in Europe and North America. Through this alliance, the group has formed a new global brand named Wiicare®, which would primarily cater to the healthcare packaging segment. We believe, this would be positive for the company, considering the recent surge in demand of healthcare products due to the ongoing pandemic. Moreover, the above is expected to support the company’s sales as the majority of the healthcare clients seek to work with business partners with technical expertise along with global and local presence. The company perfectly fits the above criteria.

• Margin stability amidst the steep rise of Raw material prices: In recent quarters, the packaging manufacturers are battling with high input costs due to the rising raw material prices, especially resin prices. The surge was due to the sharp increase in North American demand for feedstocks coupled with unplanned plant outages. Moreover, the US Gulf Coast (location of resin producers) witnessed a huge power, water, and electrical shortage and has created demand-supply mismatches due to the occurrence of the natural disaster “Uri” during mid-February which has resulted in elevated resin prices. However, the company has been able to pass the higher costs to its clients and maintained its margin. Cost of sales stood at ~71% of the revenue in Q1FY21, v/s ~70% in Q1FY20, which is impressive. Moreover, the company’s gross margin and operating margin stood at 29.3% and 15.2%, respectively, higher than the industry median of 25% and 9.7%.

Snapshot of Profitability margins (Source: Refinitiv Thomson Reuters)

• Capacity Addition to support future growth: The company is likely to offer the next generation of reusable/ recyclable thermoformable films products, which has a high entry barrier. The company has already modified its packaging facility required for the above product and is likely to commence production from the second quarter of FY21. Moreover, the company is adding two different projects related to innovative package manufacturing in the second half of FY21. The above is expected to improve the company’s upcoming business prospects and is a key positive.

Q1FY21 Financial Highlights:

• WPK impresses with its first quarter result, wherein the company posted revenue of USD 224.806 million, higher than USD 213.596 million in the previous corresponding period (pcp). The improvement was driven by decent growth from all of the three segments.

Source: Company Report

• Income from operations stood higher at USD 34.282 million v/s USD 31.121 million in Q1FY20. The increase was partially offset by higher sales, marketing and distribution expenses and higher general and administrative expenses.
• The company reported its net income of USD 25.242 million, improved from USD 23.546 million in pcp.
• Cash and cash equivalents were recorded at USD 496.224 million, while total assets were recorded at USD 1,360.229 million.

Source: Company Reports

Valuation Methodology (Illustrative): Price to Earnings based

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

Risks: The majority of the company’s expenses are related to raw materials. Volatility in raw material price would affect the company’s margin.

Stock Recommendation:

In order to meet the customer’s requirements, the company is offering innovative products to retain customer’s loyalty. The company expects its capital expenditure for FY21 within the range of USD 60 million to USD 70 million. The group was witnessing higher traction from pharmaceutical clients due to higher demand for the flexible lidding and specialized printed packaging segment and we expect the demand to remain high in the near term. Additionally, the company’s packaging machinery segment is expected to remain favorable for FY21, supported by a healthy order book. We have valued the stock using the Price to Earnings-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like CCL Industries Inc, Aptargroup Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 42.02 on May 05, 2021.

One-Year Price Chart (as on May 05, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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