Teck Resources

Teck Resources (TSX: TECK.B) is a diversified miner with coal, copper, zinc, and oil sands operations in Canada, the United States, Chile, and Peru. Metallurgical coal is Teck's primary commodity in terms of EBITDA contribution, followed by copper, zinc, and oil sands. Teck ranks as the world's second- largest exporter of seaborne metallurgical coal and is in the top-three zinc miner. It is building a major new copper mine in Chile at the majority owned Quebrada Blanca 2, in partnership with Sumitomo.

Investment rationales

• The company is targeting to improve its margins towards the end of 2020 and early 2021, as they have completed major capital projects. This is likely to bring down the interest cost; hence the margins would improve.
• Despite the difficult time due to the pandemic, the company maintained its cash flows efficiently.

Source: Company

• The company has a strong financial position to weather the effects of the pandemic and the management took steps to enhance it even further during the second quarter. Presently the company has CAD 6.9 billion of liquidity as of July 22, 2020, including CAD 430 million in cash. The group reduced near-term debt maturities and enhanced liquidity with the following measures:
• Obtained a new US$1.0 billion unsecured two-year revolving credit facility.
• Issued US$550 million of 10-year, 3.9% Notes.
• Purchased US$268 million of 2021, 2022 and 2023 Notes.
• Paid down US$266 million of its US$4 billion revolving credit facility.

• QB2 construction activities are gradually and safely ramping up: The company will be managing the pre-suspension levels with a workforce of 8,000 by the end of October. This reflects the work is resuming at the high levels.

Financial Summary Q2 2020

Source: Company

• In the second quarter revenues were CAD 1.7 billion, gross profit before depreciation and amortization was CAD 453 million.
• Profitability was impacted by the significant negative effects that COVID-19 on both prices and demand for the company’s products, as well as abnormal costs because of the pandemic.
• Bottom line adjusted profit attributable to shareholders was CAD 89 million or CAD 0.17 per share on both a basic and a fully diluted basis.
• The company’s profitability in the second quarter declined from a year ago, primarily as a result of significant decreases in prices for their principal products compared to the same period last year, as shown in the table below, and a decrease in steelmaking coal sales volumes.

Source: Company

Risk

The company’s financial performance is exposed to a variety of risks including commodity price risk, currency exchange risk. Also, the second wave of COVID-19 outbreak could further dent its performance.

Share Price Performance

Source: Refinitiv (Thomson Reuters) 

Valuation Methodology (Illustrative) – EV to EBITDA

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

Stock Recommendation: The company’s production in the second half of 2020 is expected to be between 11.0 and 12.0 million, tonnes which include the scheduled Neptune shutdown and the estimated impacts of COVID-19. Despite the production cutbacks the group is experiencing in 2020, the company will continue to maintain an annual production capacity of approximately 26 to 27 million tonnes supported by the four operations in the Elk Valley.

The group is expecting sales of 5.0 to 5.4 million tonnes in the third quarter of 2020. The impacts of COVID-19 are expected to continue to impact the balance between demand and supply for steelmaking coal. As China has started performing back, the demand for coal from their steel industries will increase gradually. The company will continue to work with its customers and monitor the effect of COVID-19.

Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 18.21 on Oct 14, 2020. We have considered First Quantum Minerals Ltd, Kinross Gold Corp, and Aginco Eagle Mines Ltd etc. as a peer group.

George Weston Limited

George Weston Limited (TSX: WN) is a Canadian public company, founded in 1882. The group has three operating segments: Loblaw Companies Limited (Canada’s largest food and drug retailer and a provider of financial services), Choice Properties Real Estate Investment Trust (Canada’s largest and preeminent diversified REIT), and Weston Foods (one of North America’s leading producers of quality baked goods).

Source: Company Filings

Loblaw is the biggest segment contributing revenue to the company. This segment alone gives 94 per cent of total revenue. While the other two segments contribute 3 per cent each.

Investment Rationales

• We expect that Loblaw’s revenue segments would experience unprecedented demand for products across multiple categories, leading to strong top-line results.
• Loblaw’s e-commerce sales accelerated by 280% in the quarter, and the group is investing in improving and expanding the capacity and same-day e-commerce service while improving the cost structure.
• In the last 12 months, the company managed to open 13 food and drug resulting in a net increase in the retail square footage of 0.1 million square feet, or 0.1%. We expect the sales mix will start to evolve as restaurants began to reopen. Food retail same-store sales would continue to perform at elevated, and drug retail same-store sales growth rates has improved, relative to the second quarter.
• The company and its operating segments maintain strong balance sheets and liquidity. Loblaw’s consolidated cash and short-term investments balance was CAD 2.6 billion. The aggregate available liquidity at Loblaw was approximately CAD 4.6 billion, including undrawn amounts under committed credit facilities.
• Loblaw’s liquidity was reduced by CAD 350 million due to the repayment of the 5.22% Medium-Term Notes, Series 2-B, which were paid on June 18, 2020. Choice Properties had CAD 1.5 billion of available liquidity under its committed credit facility and no significant debt maturities for the remainder of the year.

2020 SECOND QUARTER HIGHLIGHTS

George Weston Limited’s net loss available to common shareholders of the company in the second quarter of 2020 was CAD 255 million (CAD 1.66 per common share) compared to net earnings available to common shareholders of the company of CAD 184 million (CAD 1.19 per common share) in the same period in 2019.

Key Performance Indicators

• Revenue scaled up in the second quarter and YTD 2020 mainly due to growth in Loblaw retail, partially offset by the decline in sales in Weston Foods driven by the impact of COVID-19.
• Operating income decreased in the second quarter and YTD 2020 due to declines in the operating performance of Loblaw, Weston Foods and Choice Properties, driven by the impact of COVID-19 and related costs and the YTD net impact of adjusting items.
• Adjusted EBITDA also decreased in the second quarter and YTD 2020 due to declines in Loblaw, Weston Foods and Choice Properties driven by the impact of the pandemic and related costs.

Risk

The real-estate sector might witness a major setback due to the closures of production facilities, a decline in the rent payment ability of the tenants, lower consumer demand for tenants’ product or services, temporary or long-term stoppage of development projects etc. Further, an increase in the operating costs due to higher hygiene and sanity expenditures and in-store security, etc., on account of COVID-19 pandemic might weigh on the margins.

Share Price Performance

Source: Refinitiv, Thomson Reuters

Valuation Methodology (Illustrative) – Price to Earnings

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

Stock Recommendation

The company reported strong growth in the same-store sales, driven by improved traction from the food retail segment coupled with an increase in the Food retail basket size, which is a key positive. With the gradual re-opening of the foodservice segments and other non-essential businesses, we expect a gradual surge in the overall consumer demand, which is likely to support the company's long-term business prospects. We have valued the stock using the P/Earnings multiple based illustrative relative valuation method and have arrived at a target upside of double-digit (In percentage terms). We have considered Empire Company Ltd, Metro Inc and Dollarama Inc etc., as a peer group for the comparison purpose. Therefore, we have given a “Buy” recommendation at the closing price of CAD 96.57 on Oct 14, 2020.

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.