Intact Financial Corporation

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

Key Highlights:

• Bullish Technical: The stock of IFC is trading at an uptrend since the last one year and appreciated 21%. Moreover, the stock has closed above the Exponential Moving average of 200-days, 100-days and 50-days, indicating a bullish price trend.

Source: Refinitiv (Thomson Reuters)

• Direct premium written (DPW) growth surpasses industry median: Historically, the company performed better than the industry, while DPW reported an 8.7% CAGR growth from 2010 to 2020, higher than the industry median of 5.2% and 4.0% in Canada and the US, respectively. The consistent improvement is aided by a diverse business mix, deep claims expertise & strong supply chain network, robust capital and investment management expertise etc.

Source: Company Presentation

• Conservative Asset Management: The group maintains a conservative investment approach and has an in-house investment management team, which helps the company to maximize after-tax returns while preserving capital and limiting volatility. Notably, the company invests more than 87% to the fixed income securities, which are rated ‘A-’ or better, which capital conservation.                        

Source: Company Presentation

• Acquisition of RSA Insurance Group plc: The company is planning to acquire RSA Insurance Group plc (RSA), subject to the approval of the High Court of Justice in England and Wales in London. The above court hearing is scheduled for May 25, 2021, while the company expects its acquisition to be closed on June 1, 2021.

Q1FY21 Financial Highlights:

• IFC declared its quarterly result, wherein the group reported total revenue of CAD 3,050 million compared to CAD 3,029 million in the previous corresponding period (pcp). The improvement was driven by slightly higher net earned premiums (CAD 2,777 million v/s CAD 2,766 million in Q1FY20).
• Income before income taxes surged to CAD 630 million, considerably higher than CAD 146 million in pcp, supported by a decline in lower net claims incurred (CAD 1,431 million v/s CAD 1,829 million in pcp), while higher underwriting expense (CAD 956 million v/s CAD 890 million in pcp) remained a drag.
• Net income attributable to shareholders was reported at CAD 514 million, significantly higher than CAD 107 million in pcp.
• Cash and cash equivalents were reported at CAD 1,062 million, while the company’s total assets were recorded at CAD 35,264 million.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Increase in the total claims incurred and underwriting expenses may dampen the company’s performance and would take a toll on the overall margins of the group.

Valuation Methodology (Illustrative): Price to Book based

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

The company reported a consistent dividend growth over the years, backed by stable cash flows. From 2005 to 2020, the group’s dividend distribution recorded a CAGR of 11%. Moreover, the management is focused on lowering its debt-to-capital ratio to ~20%, from the current ~24%, while targeting to increase its equity base to ~70% from the current ~66.6%.                        

Source: Company Presentation

We have valued the stock using Price to book value based relative valuation method and have arrived at a target upside of single-digit upside (in percentage terms). For the said purposes, we have considered peers like Royal Bank of Canada, TMX Group Ltd etc. Hence, considering the above facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 159.84 on May 17, 2021.

One year-Price Chart (as on May 17, 2021). Source: Refinitiv (Thomson Reuters)

Primo Water Corporation

Primo Water Corporation (TSX: PRMW) is a leading pure water solutions provider, which have a presence across North America, Europe and Israel. The group operates through a razor/razor blade revenue model, which is an industry-leading line-up solution used for sleek and innovative water dispensers and is sold through major retailers and online platforms.

Key Updates:

• Stock Price hovering above the Support-zones: The PRMW stock closed above the simple moving average (SMA) of 200-days and 100-days, indicating a bullish pattern. Moreover, the stock gained ~46% in the one year, which shows growing investors interest in the stock.                 

Source: Refinitiv (Thomson Reuters)

• Favorable Macro Dynamics: The company has a resilient business model as pure water is an essential segment and is immune to the economic cycle. Moreover, deterioration in infrastructure due to the degradation of municipality water systems has resulted in higher demand for pure water. An additional trend like health consciousness around drinking more water and focus on water purity among the youth has also contributed to the growth. We believe, due to these factors, the demand for pure water is likely to remain elevated in the coming days, and the company is highly poised to take advantage of the growing demand.

Q1FY21 Financial Highlights:

• PRMW announced quarterly result, wherein the company posted revenue of USD 478.4 million, marginally higher than USD 474.1 million in the previous corresponding period (pcp).
• Gross profit slide to USD 264.5 million, as compared to USD 273.3 million in pcp, due to an increase in the cost of sales (USD 213.9 million v/s USD 200.9 million in pcp).
• The group reported an operating income of USD 13.1 million, as compared to an operating loss of USD 4.0 million in Q1FY20. The quarter witnessed lower selling, general and administrative expenses amounting to USD 248.0 million v/s USD 255.1 million in Q1FY20.
• The group reported a net loss from continuing operation of USD 10.2 million, as compared to a net loss of USD 27.4 million in pcp.
• Cash and cash equivalents were recorded at USD 102.2 million, while total assets were recorded at USD 3.558.4 million.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risk: A change in consumer preference would lead to a deterioration in the company’s sales and overall performance.

Valuation Methodology (Illustrative): Price to Earnings

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

The company would be looking for an increase in the proliferation of Household Dispensers through increase in customer awareness via several partnerships and promotions. In order to enhance its customer base, the management is planning on new customer acquisition through cross-selling and up-selling strategies, proper customer retention and service level and by growing its e-commerce platform. We have valued the stock using the Price to Earnings based relative valuation approach and arrived at a target price, which suggests a single-digit upside potential (in % terms). For the said purpose, we have considered peers like National Beverage Corp, Chemed Corp etc. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 21.04 on May 17, 2021.

One year-Price Chart (as on May 17, 2021). 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.