Intact Financial Corporation

Intact Financial Corporation (TSX: IFC) is a property and casualty insurance company which provides written premiums in Canada.

Recent Update:

The group announced that it had completed the previously announced private placement of subscription receipts to Caisse de dépôt et placement du Québec ("CDPQ"), Canada Pension Plan Investment Board and Ontario Teachers' Pension Plan Board of an aggregate of 23.8 million Subscription Receipts at a price of CAD 134.50 per subscription receipt for aggregate gross proceeds of approximately CAD 3.2 billion. The proceeds would be allocated to fund a portion of the purchase price for the previously announced acquisition of RSA.

Key Highlights:

• Long-term Strategies: In order to sustain the company’s market share and add consistent growth, the company is focusing a clear road map on a long-term basis. The company would enhance its leadership position across Canada through digital engagement, improving customer experiences, scaling its distribution network. The company also possesses deep Claims expertise & a strong supply chain network and has strong capital & investment management expertise. The company expects a ~10% CAGR in NOI per share over the next decade.                                                                   

Source: Company Reports

• Impressive Growth rate: Over the years, the company reported an impressive growth rate and captured ~17% market share in FY19 from 11% market share in FY19, driven by decent growth across personal property segment, commercial and personal auto segments. Moreover, the company reported an 11% CAGR during the last 15 years in its dividend per share, supported by strong profitability growth.   

Source: Company Presentations

• High-quality investment portfolio: The company has an inhouse investment management team which offers balanced portfolio support and avoids capital erosion through prudent allocation. Capital management helps the company to sail its operations during the economic slowdown, which is a key positive.

Portfolio Snapshot (Source: Company Presentation)

Q3FY20 Financial Highlights:

• IFC announced its quarterly results, wherein the company posted total revenue of CAD 3,127 million, higher than CAD 2,828 million in the previous corresponding period (pcp). The improvement was driven by an 8% y-o-y growth in the premiums, supported by the acquisition of The Guarantee.
• Income before income taxes surged to CAD 426 million, as compared to CAD 232 million in Q3FY19, thanks to higher revenues, a slightly lower net claims incurred, net gains versus a net loss, partially offset by higher underwriting expenses (CAD 933 million versus CAD 797 million in pcp).
• Net income attributable to shareholders stood significantly higher at CAD 334 million, as compared to CAD 187 million in Q3FY19.
• The company ended the quarter with cash and cash equivalents of CAD 837 million, while the company’s total assets stood at CAD 34,110 million.
• During the quarter, the company’s combined ratio increased by 5.2% to 87.1%.               

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company is not immune to the risks present in the industry. Some of the highlighted risks include adverse economic conditions which may decrease the estimated value of the collateral securing loans and leases. COVID-19 pandemic could lead to financial losses in the company's portfolio and a decrease in its net income and book value. Any of these events, or any other circumstances caused by turmoil in world financial markets, may have a material adverse effect on the business and financial condition.

Valuation Methodology: Price to Book Based (Illustrative)

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

Stock Recommendation:

The stock has closed above the technical support of 200-days, 150-days and 50-days simple moving averages (SMA), indicating a bullish trend. The company’s Canadian operations have an MCT of 205%, and US subsidiary has RBC of 451%, both at substantially high levels. The company’s total capital margin, which is based on a 165% MCT effective April 1, 2020, stood at a robust CAD 1.9 billion. By maintaining a strong balance sheet and capital position, the company can withstand the shocks driven by volatility in financial markets. The strong balance sheet positions the company well to capture growth opportunities. We have valued the stock using Price to book based relative valuation method and have arrived at a target upside of high single-digit (in percentage terms). For the said purposes, we have considered peers like Element Fleet Management Corp, Sun Life Financial Inc etc. Hence, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 148.49 on December 2, 2020.

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

Park Lawn Corporation

Park Lawn Corporation (TSX: PLC), provides goods and services associated with the disposition and memorialization of human remains. The Company's products and services are sold on a pre-planned basis (pre-need) or at the time of a death (at-need). The Company and its subsidiaries own and operate businesses, including cemeteries, crematoria, funeral homes, chapels, and a transfer service. 

Key highlights 

• Favourable Age Demographics would help in generating revenue: The company is uniquely positioned to take advantage of favourable population demographics, driven by the aging of the population born between 1946 and 1964. The rising population will provide many opportunities for the company’s funeral homes and cemeteries for preneed sales and planning.

Source: Company

• Rising Cremation Rates: Since 2016, the number of families in North America choosing cremation has outnumbered those choosing traditional burial, primarily due to the growth of the nuclear family along with the decline of cultural traditions. The group is operating in markets with high cremation rates (Toronto, New York, New Jersey, Colorado, and New Mexico).

Source: Company 

• The bullish stance of management: The group is optimistic about their operations, and the management expects healthy growth in Adjusted EBITDA over fiscal 2022. The company targets CAD 100 million of Adjusted EBITDA and margin of 26%.

Source: Company 

Financial overview of Q3 2020

Source: Company 

• In Q3 2020 the company’s sales increased by 32% to CAD 79.5 million, as against CAD 60.2 million in Q3 2019. The increase in sales was primarily driven by growth in funeral and cemetery business along with the successful integration of completed acquisitions.
• Gross profit stood at CAD 67.7 million in Q3 2020, as against CAD 54 million in Q3 2019, driven by high revenue generated in the reported quarter.
• Net earnings in Q3 2020, increased by 238% to CAD 5.4 million, as against CAD 1.6 million in the previous corresponding period. 

Risks associated with investment

Liquidity and interest rate risks could affect the operations of the company. Any change in regulations and government policies can also affect the overall business of the company.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

The Company has shown an improvement in financial performance on a continues basis. The Company clocked a CAGR of 50.5% in revenues during FY16 – TTM Q3 2020 and a CAGR of 60.5% in Adjusted net earnings for the same period. Revenue from the core business of the Company improved, along with the benefits from the successful integration of acquisitions made by the Company in the past, the group is also looking for the new opportunities in the form of acquisitions. Therefore, based on the above rationales and valuation, we have given a ‘Hold’ recommendation at the closing price of CAD 29.05 on December 02, 2020. We have considered New Look Vision Group Inc, Savaria Corp, GDI Integrated Facility Services Inc, etc. as the peer group for the comparison.

1-One Year Price Chart (as on December 02, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

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.