Restaurant Brands International Inc.

Restaurant Brands International Inc. (TSX: QSR) is a leading global quick-service restaurant chain and derives its revenue primarily from the franchise royalties and distribution sales to franchisees. 

Key Highlights:

• On December 11, 2020, the company informed that TRC Capital would purchase 0.66% of the company's outstanding common shares at a price consideration of CAD 73.75 per share. The company does not endorse this unsolicited offer, has no association with TRC Capital or its offer, and recommends that shareholders do not tender their shares to the offer.
• At the end of September 2020, the company reported that ~96% of the company’s restaurants remained open worldwide, which includes restaurants across North America, Asia Pacific, Europe and Middle east etc. Moreover, the group reported ~92% stores opening across Latin America. With the increase in the overall traction through reopening of stores, the company would likely to generate ample cash flows.
• During the quarter, the company issued USD 1.4 billion of Second Lien Notes and also planning to issue USD 1.5 billion of Second Lien Notes, which have a due date of 2030. We believe, with the current liquidity, the company would be able to fund its short-term capital requirements, which is a key positive.

Q3FY20 Financial Highlights:

• QSR announced its quarterly results, wherein the company posted total revenues of USD 1,337 million, lower than USD 1,458 million in the previous corresponding period (pcp). The decline was primarily attributed to a decrease in system-wide sales due to a decrease in comparable sales on account of temporary store closure amid COVID 19 pandemic.
• Income from operations stood at USD 417 million, as compared to USD 571 million in Q3FY19. The decrease was due to a lower income, and a rise in the total operating costs and expenses (USD 920 million versus USD 887 million in Q3FY19).
• The company’s net income stood at USD 223 million, as compared to USD 351 million in pcp.
• The company posted cash and cash equivalent of USD 1,919 million, while total assets stood at USD 22,533 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The second wave of COVID 19 might lead to social distancing measures and closures of stores across the globe, which might lead to lower royalty income for the company.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation:

With the gradual reopening of the stores, the group is expected to report an improved income, supported by higher tractions in its stores across the globe, which is a key positive. The company has a strong presence across North America and has reported the opening of its 300th Burger King restaurant in Canada, which is notable and indicates growing demand for the product, amidst the current downturn. Moreover, the Management highlighted that it would open a hundred new restaurants in Canada in the next five years. Further, the stock of QSR offers a dividend yield of ~3.48% aid low-interest rate environment. We have valued the stock using the price to cash flow based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Mcdonald's Corp, Chipotle Mexican Grill Inc etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 79.0 on December 16, 2020.

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

Cascades Inc.

Cascades Inc. (TSX: CAS) produces, convert and market packaging and tissue products composed mainly of recycled fibers. The group operates through four main business segments: Containerboard, Boxboard Europe, Specialty Products and Tissue Papers. 

Key Highlights:

• Decline in raw material Prices: The company has benefitted from lower raw material prices over the years, which has resulted in a lower cost of material and subsequently supported the margins. We expect the above trend to continue in the foreseeable future and would support the margins of the company. Moreover, with the revival of the economy, we expect an improved revenue-mix, which would drive the performance. 

Source: Company Presentations

• Stable operating Performance and Healthy Ratios: The company reported consistent growth in its total shipments and has retained its capacity utilization rate above 90%, despite the current slowdown in the economy, which is encouraging. The company further reported a growth in its return on assets, which increased from 11.4% in Q3FY19 to 12.8% in Q3FY20.

Source: Company Presentations

Q3FY20 Financial Highlights:

• CAS announced its quarterly results, wherein the company posted its sales at CAD 1,275 million, improved from CAD 1,264 million in the previous corresponding period (pcp). The slight increase was primarily attributable to volume growth of 7% within the Containerboard segment coupled with favourable foreign exchange rate across the business segments. Most of the positives were partially offset by lower sales volume within the Tissue segment and lower average selling prices along with weak revenue mix across all packaging segments.
• Operating income stood lower at CAD 73 million, as compared to CAD 108 million in Q3FY19, due to an increase in the cost of sales (CAD 1,202 million versus CAD 1,156 million).
• Earnings before income taxes stood at CAD 55 million, as compared to CAD 62 million in Q3FY19, partially supported by a foreign exchange gain on long-term debt and financial instruments.
• The group reported net earnings of CAD 49 million, improved from CAD 43 million in pcp, supported by a recovery of income taxes amounting CAD 3 million against an income tax expense of CAD 12 million in Q3FY19.
• The company reported its cash and cash equivalent at CAD 227 million, while total assets stood at CAD 5,343 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Unfavorable revenue mix due to lower demand for the high-margin products might dampen the company’s margins and profitability.

Valuation Methodology (Illustrative): EV to Sales

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

Stock Recommendation:

The company reported higher cash from operating activities at CAD 383 million for 9MFY20, higher than CAD 297 million in 9MFY19, which is impressive considering the ongoing economic cycle. Moreover, the group reported a leverage ratio of 3.0x at the end Q3FY20, down from 3.1x in Q2FY20 and 3.25x at Q3FY19, which is commendable. The company’s Containerboard & Tissue Papers segments are likely to be benefited from lower raw material pricing. The tissue segment is likely to benefit from pricing improvement & initiatives, while Specialty Products segments would benefit from positive volume and improved selling prices. The stock closed above the long-term support levels of 100-days, 150-days, 200-days simple moving average (SMA), indicating a bullish trend. We have valued the stock using EV to Sales relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like KP Tissue Inc, West Fraser Timber Co Ltd etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 14.93 on December 16, 2020.

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

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