Empire Co Ltd.

Empire Co Ltd. (TSX: EMP.A) operates in food retailing, investments, and other operations. The food retailing division operates through Empire's subsidiary Sobeys and represents nearly all of the company's income.

Key Highlights:

• Improved Margins: In Q1FY22, the company reported a higher margin than the industry median, which indicates higher cost efficiency from its peers. Gross margin and EBITDA margin stood at 25.10% and 7.30%, respectively in Q1FY22, compared to the industry median of 21.7% and 5.6%, respectively. The group reported its operating margin at 4.6%, higher than the industry median of 3.8%.
• Higher dividend payment backed by higher cash flows: In Q1FY22, the company reported a higher dividend distribution of CAD 39.9 million compared to CAD 35.0 million a year ago. The increase was supported by a higher cash flow of CAD 424.6 million in Q1FY22, as compared to CAD 399.4 million in pcp.
• Focus on e-Commerce to accelerate growth: The company has seen growing consumer’s preference for the home deliver option. Moreover, an increase in restrictions due to pandemic also fueled the above consumer trait. The company has scaled up its eCommerce activity and is increasing its investments across the eCommerce fulfilment centers, which is a key positive.  

Q1FY22 Financial Highlights:     

• A announces its quarterly result, wherein the company posted sales of CAD 7,626 million, higher than CAD 7,354.2 million in the previous corresponding period (pcp). The increase in sales was due to the acquisition of Longo’s coupled with higher fuel sales as a result of increased fuel prices and consumption.
• Operating income declined to CAD 347.4 million, from CAD 377.6 million in pcp. The slide was due to a higher cost of sales (CAD 5,713.8 million v/s CAD 5,505.6 million in pcp) coupled with elevated selling and administrative expenses.
• The group reported its net earnings of CAD 211.9 million, marginally lower than CAD 216.8 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s products are subjected to seasonality and fluctuations in inflation. Moreover, a change in consumer preference might lead to a demand destruction scenario.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

With the slowdown in the restrictions, consumers are expected to shop more frequently and at more grocery stores, which would increase the company’s overall sales volume.  In order to cater for the growing customer demand, the company is planning to open new 11 stores in the remainder of FY22. We have valued the stock using the 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 industry (consumer non-cyclicals) median on an NTM basis. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 38.47 on September 21, 2021.

One-Year Technical Price Chart (as on September 21, 2021). Source: REFINITIV, Analysis by Kalkine Group

Element Fleet Management Corp. 

Element Fleet Management Corp (TSX: EFN) is a leading fleet management company, which provides world-class fleet management services that empower extraordinary results across the total fleet lifecycle.

Key Highlights:

• Robust margins: The company commands higher margins than its peers and posted gross margin and EBITDA margin of 85.2% and 57.8%, respectively, in Q2FY21. These numbers were higher compared to the industry median of 48.6% and 38.6%, respectively. Operating margin and net margin during the period stood at 28.9% and 21.2%, respectively, as compared to the industry median of 24% and 18.9%, respectively.
• Surge in dividend payment amidst turbulent times: The company reported a higher dividend distribution despite the current economic conditions, which is a key positive. Notably, in H1FY21, the company distributed a total dividend of CAD 73.097 million, which was significantly higher than CAD 55.036 million in pcp.
• Strong operational history through product innovation: The company has a strong clientele base and has a successful track record of fostering supplier diversity since 1990. The company has innovated its offerings in a periodical manner in order to retain its market share. In the second quarter of FY21, the company launched our state-of-the-art North American Vehicle Ordering (NAVO) platform, which is expected to provide improved operational efficiency to its clients through the reduction of manual processing requirements and automation of order transmission.

Q2FY21 Financial Highlights:

• EFN announced its quarterly result, wherein the company posted net revenue of CAD 235.402 million, lower than CAD 225.503 million in Q2FY20. The increase was supported by an increase in net interest income and rental revenue.
• Operating expenses stood at CAD 108.890 million, as compared to CAD 114.359 million in Q2FY20. The decline was primarily due to a slide in the general & administrative expenses, and a slight decline in salaries, wages and benefits expenses. 
• Net income for the period jumped to CAD 80.872 million, from CAD 58.594 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The company reported a higher debt as compared to the industry median, and continuation of the trend would dampen the company’s financial flexibility.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The company reported consistent growth in its order book, which is a key positive. Notably, in H1FY21, the company reported a 56% y-o-y jump in its U.S. and Canadian order book, while Custom Fleet’s order has grown by 46% on a y-o-y basis. As a result, the order book reached closer to the pre-pandemic levels. Moreover, the company expects near-term client demand for vehicles across the U.S. and Canada to continue in the rest of FY21. We have valued the stock using the 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 industry mean on an NTM basis. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 13.23 on September 21, 2021.

One-Year Technical Price Chart (as on September 21, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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.