Hydro One Ltd

Hydro One Ltd (TSX: H) is a Canada-based electricity transmission and distribution service provider. They distribute electricity across Ontario to nearly 1.4 million predominantly rural customers, or approximately 26% of the total number of customers in Ontario. The Company’s segments include Transmission, Distribution and Other.

Key highlights

• An Income play:The Company has a solid track record of consistent dividend payment, backed by stable cash flows. Recently the company paid a quarterly cash dividend of CAD 0.2663 per share on July 2, 2021. Moreover, at the closing price, the stock was offering a dividend yield of 3.540%, which looks decent, considering the current economic scenario and interest rates.

• Request made by an Independent Electricity System Operator (IESO): Recently, the Company was requested by the “IESO” to build a 230-kilovolt double circuit transmission line between Chatham and Lambton to provide electricity in support of agricultural growth in the Windsor-Essex and Chatham areas. The IESO is expecting the agricultural electricity demand in the region to grow from 500 MW today to about 2,000 MW by 2035. If approved by the OEB, the line would be in service by 2028.
  

• Healthy liquidity: The company is maintaining healthy liquidity, on March 31, 2021, Hydro One Inc. had CAD 815 million in commercial paper borrowings, in addition, the Company has revolving bank credit facilities with a total availability balance of CAD 2,550 million. The Company's currently available liquidity is also expected to be sufficient to address any reasonably foreseeable impacts.

  Financial overview of Q1 2021

 Source: Company

• In Q1 2021, the company posted revenues of CAD 1,811 million, against CAD 1,850 million in the previous corresponding period. The drop in revenue was mainly due to lower performance from distribution segment which registered a degrowth of 5.9%.
• The group posted higher Income before financing charges and income tax expense at CAD 412 million in the reported period, against CAD 366 million in pcp. An increase was primarily due to lower expenditures.
• Net Income in Q1 2021, stood at CAD 270 million, increased by CAD 38 million, against CAD 232 million in pcp. The increase in Net Income was primarily due lower expenses.
  

Risks associated with investment

The company is exposed to many risk factors which alone or in a cumulative manner can affect the company’s operations and financial health. Some of the risks include the supply of and demand for energy, adverse weather conditions, falling approved rates might lead to lower-income, inflation, interest rates, etc. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

We believe the company would post much better numbers in the upcoming period supported by the revival in the economy, which has started generating the demand in the energy sector. Furthermore, recently the Company was requested by the “IESO” to build a 230-kilovolt double circuit transmission line, is key positive. The company continued to distribute dividend amid a challenging operating environment, on top of this the stock is delivering healthy yield of more than 3.540% which looks impressive and encouraging from an investor’s point of view. Therefore, based on the above rationales and valuation, we recommend a “Hold” rating on the stock at the closing price of CAD 30.09 as on July 05, 2021. We have considered Emera Inc, Canadian Utilities Ltd, Fortis Inc etc. as the peer group for the comparison.

One-Year Technical Price Chart (as on July 05, 2021). Source: REFINITIV, Analysis by Kalkine Group 

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 Q4FY21, 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 25.90% and 7.20%, respectively in Q4FY21, higher than the industry median of 22.2% and 5.3%, respectively. The group reported its operating margin at 4.3%, as compared to the industry median of 3.2%.  

• Acquisition of Longo to enhance future prospects: Recently, the company announced its acquisition of Longo, a specialty grocery retailer in Ontario. The company has a Grocery Gateway e-commerce business also. This is likely to generate strong free cash flow for the group, as it has ten retail stores and has the plan to open new five stores in the coming days. With the new acquisition, the company would offer a wide range of products and services to its clients. Moreover, due to the recent change in consumer preference towards the online segment, the entity would be able to cater for the targeted customer through Longo’s already established Grocery Gateway.

FY21 Financial Highlights:

• The company announces its quarterly result, wherein it posted sales of CAD 28,268.3 million, higher than CAD 26,588.2 million in the previous corresponding period (pcp). The increase was driven by improved traction from the Food retailing segment, and the expansion of FreshCo in Western Canada and Farm Boy in Ontario 
• Operating income stood higher at CAD 1,299.5 million, as compared to CAD 1,111.8 million in pcp. The increase was supported by higher revenue while elevated cost of sales and SGA expenses remained a drag.
• The group reported its net earnings of CAD 764.2 million, as compared to CAD 612.8 million in pcp.

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.

Stock Recommendation:

Recently, the Company introduced an online grocery home delivery e-commerce platform, Voilà by Sobeys, which has industry-leading technology and fills orders through its automated customer fulfilment centre. The above technology is run through robotics technology, which assembles and delivers orders efficiently, which leads to cost efficiency due to minimal product handling. For FY22, the company expects its capital spending at around ~CAD 765 million and expects half of its investment for renovations and additions of new stores. On the valuation front, the stock is available at an EV to Sales multiple of 0.5x on an NTM basis, as compared to the industry (Consumer Non-cyclicals) median of 2.0x. Hence considering the above facts, we give a ‘Hold’ recommendation on the stock at the closing price of CAD 40.02 on July 05, 2021.

One-Year Technical Price Chart (as on July 05, 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.