PrairieSky Royalty Ltd

PrairieSky Royalty Ltd (TSX: PSK), is a royalty company, generating royalty production revenues as petroleum and natural gas are produced from its properties. PrairieSky has a diverse portfolio of properties that have a long history of generating funds from operations and that represent the largest and most consolidated independently owned fee simple mineral title position in Canada.

Key Highlights 

• Acquiring new Royalty Asset: The company entered into a definitive agreement to acquire a large royalty portfolio, which would consolidate a significant fee mineral title position in Western Canada within the Company. The acquisition includes approximately 640,000 net acres of additional producing and undeveloped royalty interests. The acquisition would enhance approximately 650 BOE per day of royalty production, a key positive for the company. The transaction would be completed by February 2021, with a cash consideration of CAD 45.0 million.

• Sequential improvement in production and revenue: In Q4 2020, royalty production volumes increased 3% to 19,281 BOE/day from 18,745 BOE/day in Q3 2020 and generated CAD 43.6 million in royalty production revenue, a 14% increase from Q3 2020. Oil royalty production volumes averaged 7,313 barrels/day, 11% above Q3 2020 average royalty production volumes of 6,572 barrels/day due to new wells on stream and previously shut-in production being brought back on. Furthermore, this sequential improvement in royalty production volume reflects the improvising scenario for the company. 

• Increase in dividend distribution: On January 15, 2021, the company paid a quarterly dividend of CAD 0.06 per common share and recently, the Board of Directors approved an 8% increase in the annual dividend to CAD 0.26 per common share or CAD 0.065 per quarter, effective for the March 31, 2021 record date. 

• Minimizing cash administrative expenses: In the reported quarter, the company’s cash administrative expenses stood at CAD 3.5 million or CAD 1.97 per BOE and CAD 18.0 million or CAD 2.49 per BOE for the full year 2020, representing an all-time low. The company is focused on managing controllable costs in its business and expect cash administrative expenses to remain well below CAD 3.00 per BOE in 2021. 

Source: Company 

Financial overview of Q4 2020

Source: Company 

• In Q4 2020, royalty production volumes increased 3% to 19,281 BOE/day from 18,745 BOE/day in Q3 2020.
• The company reported royalty production revenues of CAD 47 million in Q4 2020, increased 8%, compared to CAD 43.6 million in Q3 2020. The increase was primarily due to improved exploration and development activity from third-party operators.
• Net earnings increased to CAD 14.1 million in Q4 2020, against CAD 9.4 million in Q3 2020. 

Risks associated with investment

Petroleum and natural gas royalty structures are typically linked directly to production volumes from the lands, with certain royalty structures linked to production volumes and/or price. As a result, the company’s net earnings can be significantly impacted by fluctuations in commodity prices and production volumes. 

Valuation Methodology (Illustrative): Price to Earnings 

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

Stock recommendation

The company reported decent improvement in the reported quarter on sequential basis, driven by gradually recovery in the energy demand and crude oil prices. With the improved demand for crude oil, we expect the production volumes by the payors would remain elevated in the coming days, which would further support the company’s royalty income. Recently, the company entered into a definitive agreement to acquire a large royalty portfolio, which will consolidate a significant fee mineral title position in Western Canada, the acquisition will enhance approximately 650 BOE per day of royalty production, a key positive for the company. Furthermore, the company approved an 8% increase in the annual dividend to CAD0.26 per common share or CAD0.065 per quarter, effective for the March 31, 2021 record date. Therefore, based on the aforesaid factors and valuation, we recommend a ‘Buy’ rating at the closing price of CAD 11.36 on February 9, 2020. 

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's platform combines proprietary technology and network management capabilities with tens of thousands of independent qualified field agents.

Key Updates:

• Better than industry margins: The group has delivered improved operational efficiencies in the recent past, which is inevitable from its EBITDA margin, operating margin and net margin that came at 13.7%, 12.7% and 5.9%, respectively, higher than the industry median of 12.7%, 8.7% and 5.9%, respectively.

• Strong traction from the U.S. Title and Canada segments: During the quarter, the group reported strong momentum from the U.S. Title and Canada segments, which grew 39% and 40.7%, respectively on y-o-y. Revenues within the U.S. Title segment was higher due to higher market volumes for refinance activity, coupled with improved market share and net new client additions. On the other hand, the Canada segment witnessed higher appraisal volumes supported by higher market share with specific Canadian clients combined with stronger market volumes in Canada.

Q1FY21 Financial Highlights:

• REAL announced its quarterly results, wherein the group posted revenue of USD 120.298 million, increased from USD 103.781 million in the previous corresponding period (pcp). The increase was primarily driven by higher revenue from the U.S. Title segment (USD 39.937 million versus USD 28.723 million in pcp) and higher income from Canada segment (USD 10.806 million versus USD 7.679 million in Q1FY20). Moreover, revenue from the U.S. Appraisal segment (highest revenue contributor) improved to USD 69.6 million from USD 67.4 million in pcp.
• The quarter was marked by higher operating expense (USD 27.509 million, versus USD 21.555 million in pcp), increase in transaction costs (USD 76.272 million versus USD 68.511 million in pcp), and a higher net foreign exchange loss (USD 5.961 million versus USD 3.133 million in pcp).
• Net income stood at USD 7.089 million versus USD 5.133 million in Q1FY20.
• The group reported cash and cash equivalents of USD 118.627 million, while total assets were recorded at USD 243.112 million.

Q1FY21 Income Statement Highlights (Source: Company Reports)

Risks: The operations of the company depend upon the mortgage market, which is impacted by many factors, such as broader economic conditions, changes to interest rates, changing regulations etc.

Valuation Methodology (Illustrative): EV to Sales based

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

Stock Recommendation:

The company has a strong footprint within the U.S. Title segment and has added more than 100 mortgage lender clients (Tier 2 and Tier 3 clients) in the last two years, which has subsequently increased the market share for the group and is a key positive. The U.S. Appraisal Segment reported a strong margin expansion from 51.9% in FY19 to 59.1% in Q1FY21, which is encouraging. The company introduced U.S. Title business in FY16 and is focusing on expanding its margins, through leveraging its platform. EBITDA margin from the above segment grew to 48.4% in Q1FY21 from 29.2% in FY19, which is commendable. The long-term prospects of the company remain positive, while the group expects an expansion in the Net Revenue and Adjusted EBITDA margins, driven by the increase in the volumes. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like CGI Inc, Descartes Systems Group Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 18.25 on February 09, 2021.

REAL 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.