Canadian Tire Corporation Limited

Canadian Tire Corporation Limited (TSX: CTC.A) is a Canadian company with a portfolio of businesses, which include Retail division, CT REIT and a Financial services segment. It was founded in 1992, and currently, it has more than 1,740 outlets.

Q2FY20 Financial Highlights: Canadian Tire Corporation declared its quarterly results, wherein the Company posted revenue of CAD 3,161.8 million, reflecting a decline of 14.2% on y-o-y basis. The decline was primarily attributed to temporary store closures across all banners which was partially offset by improved shipments at Canadian Tire and the inclusion of Party City. The group reported a lower income from the Financial Services segment on account of a lower card sales revenue coupled with a dip in credit charges. The group’s gross margin stood at CAD 940.7 million, as compared to CAD 1,143.9 million in Q2FY19, due to lower revenue. Gross margin as a percentage of revenue stood at 29.8%, as compared to 31% in Q2FY19. Income before income taxes stood at CAD 8.3 million, drastically lower than CAD 261.3 million in pcp, due to a lower gross margin, inclusion of other expense against other income, a marginally lower selling, general and administrative expenses and a higher net finance costs. Net income came lower at CAD 2.3 million, reflecting a fall of 98.9% on y-o-y basis.

Q2FY20 Income Statement Highlights (Source: Company reports)

Risks: A second wave of the novel virus might result in store closure, which would affect the group’s performance. Furthermore, the Financial Services segment might witness a setback due to higher credit loss, which would hinder the overall performance.

Valuation Methodology: P/Earnings Based (Illustrative)

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

Stock Recommendation: The group mentioned that at the end of the second quarter, substantially all of the company's 1,445 stores in Canada were open for business. After reopening the stores, the group is recording higher traction and improvement in sales, which is encouraging. The company also saw a larger basket size, majorly within the Active Families customer segment, which is indicative of evolving Canadian shopping behavior. The group will be focusing on consumer behavior and would offer products as per the demand, which is a key positive. The company reported a 1.7% improvement within the retail sales, amidst a store closure during the period, which is impressive. With the temporary store closures in Ontario during the second quarter, there has been a higher demand in the eCommerce channel, and we expect the e-commerce segment to drive the growth in the future. The company is focusing on improving its operational efficiency and targeting ~CAD200 million in annualized savings by 2022, a key positive for the margin. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a lower single-digit upside (in percentage terms). For the said purposes, we have considered peers like Metro Inc, Empire Company Ltd and Alimentation Couche-Tard Inc etc. Considering the aforesaid facts, we recommend a 'Hold' rating on the stock at the closing market price of CAD 128.67 on September 22, 2020.

CTC.A Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

GDI Integrated Facility Services Inc.

GDI Integrated Facility Services Inc. (TSX: GDI) is engaged in the facility services sector. The company's operating segment includes Janitorial Canada, Janitorial USA, Technical services, and complimentary services. 

Q2FY20 Financial Highlights: GDI reported its quarterly numbers, wherein revenue stood at CAD 326.732 million, as compared to CAD 312.756 million in the previous corresponding period (pcp). The growth was primarily driven by the Acquisitions made during 2019 and 2020, partially offset by the organic decline of 9.8% on y-o-y basis due to the COVID-19 pandemic. The quarter was marked by the decline in the recurring services and projects provided, partly offset by additional incremental services in the Janitorial Canada and Janitorial USA segments. Operating income stood significantly higher at CAD 29.792 million, as compared to CAD 2.108 million in pcp. The quarter was marked by a significant rise in the net finance expense, due to an increase in the remeasurement of cash-settled share-based compensation. Net income was reported at CAD 13.485 million, as compared to CAD 2.108 million in Q2FY19. The group reported a cash balance of CAD 7.214 million, while total assets were reported at CAD 760.265 million. Long-term debt increased to CAD 194.80 million, against CAD 164.724 million in FY19.

Q2FY20 Income Statement highlights (Source: Company Reports)

Risks: The recent quarter witnessed a slow-down due to the pandemic wherein the clients, with recurring businesses, has stopped subscription for a while, which is a major challenge for the company. Continuation of the above trend would dampen the overall performance of the company.

Valuation Methodology: Price/Earnings Based (Illustrative)

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

Stock Recommendation: The stock of GDI stood resilient in the recent past and increased ~51% and ~29% in the last six months and one year, respectively. The group reported decent numbers driven by recent acquisitions. The quarter showed tremendous organic growth of 34.2% on y-o-y basis in complementary services, aided by higher demand for janitorial supplies which are produced and distributed by this segment, which is a key positive amidst the current downturn. The company believes that the challenging part of the virus has been dealt with, and with the reopening of the economy and rising occupancy rates, the base level of services required by the clients may also rise. With the high level of uncertainty surrounding COVID-19, the company seems to be well-positioned to preserve profitability and ensure financial health. The stock appreciated ~18% in the last three months, outperforming the index by a small margin. The stock was trading above the 200-day SMA, indicating a bullish trend. We have valued the stock using Price to Earnings-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered Boyd Group Services Inc, Hardwoods Distribution Inc, Park Lawn Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 38.35 on September 22, 2020.

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

Disclaimer

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