Primo Water Corporation

Primo Water Corporation (TSX: PRMW) is a beverage company based out of Canada and provides water solutions. The Group, along with its subsidiaries such as Aimia Foods, Eden Springs and DS Services, offers bottled water with office and home delivery. Primo also sells self-service refill drinking water, purified bottled water and water dispensers in Canada and the USA.

 The Company would disclose its second quarter FY20 results on August 06, 2020.

Q1FY20 Financial Highlights: PRMW released its quarterly results and reported revenue USD 474 million as compared to USD 428 million in the previous corresponding period (pcp). The increase was driven by decent customer growth, improved volume, favorable pricing and the benefit of acquisitions. Gross profit stood higher at USD 273.3 million against USD 243.1 million in Q1FY20, thanks to higher revenue. The Company reported an operating loss of USD 4 million, as compared to an operating profit of USD 0.7 million in pcp, due to an increase in selling, general and administrative expenses. Net loss from continuing operations widens to USD 27.4 million as compared to a loss of USD 22.7 million in pcp. At the end of the quarter, cash and cash equivalent stood at USD 112.2 million, while total assets stood at USD 3,719.1 million.

Guidance: For the First half of FY20, the Company expects its revenue to be within the range of USD 915 to USD 935 million while adjusted EBITDA is estimated at around USD 140 million to USD 145 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due the latest acquisition of Legacy Primo, the Company witnessed a higher SG&A expense, which might take a toll on the company’s profitability. Further, the group might not achieve the desired synergies from the acquisition.

Valuation Methodology: P/CF Relative Valuation (illustrative)

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

Stock Recommendation: The stock of PRMW soared ~37% in the last three months and outperformed the index by ~22%. Amidst the turbulent economic scenario, the Company has increased its H1FY20 revenue guidance and reaffirmed EBITDA levels, which is impressive. Furthermore, the Company repaid CAD 100 million out of CAD 170 million revolving credit facility, drawn in March 2020, which is impressive. The business is categorized under the 'essential services' and is immune to the economic cycle, which ensures stable income and cash flows. The Group has a healthy market presence and an impressive customer base. The Group witnessed decent growth in its other water retail and water dispensers' segments, and we expect the momentum to continue in coming quarters. Investors should note that the stock is trading above its 200 days simple moving average of CAD 17.08, which indicates a bullish trend. We have valued the stock using the price to CF-based relative valuation approach and arrived at a target price offering single-digit upside potential. For the said purpose, we have considered the industry median (Consumers non-cyclicals). Hence, we recommend a 'Hold' rating on the stock at the closing market price of CAD 18.64 as on July 17, 2020.

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

New Gold Inc

New Gold Inc (TSX: NGD) is a mining company based out of Canada, which is engaged in the business of exploration and development of gold. The Group owns assets in the Mexican region and Canadian region which include, Cerro San Pedro Mine, New Afton Mine and Rainy River mine.

The Company will announce Q2 financial results on 30^th July 2020.

Operational Update Q2 and H1 FY2020 (14^th July 2020)

The total production of gold equivalent and gold stood at 98,079 ounces and 64,294 ounces, respectively for Q2 FY2020, while total production for silver stood at 134,282 ounces and copper at 16.9 million pounds for the period. The total production of gold equivalent and gold stood at 201,514 ounces and 131,084 ounces, respectively for H1 FY2020. The production at Rainy River Mine stood at 49,633 ounces and 48,800 ounces of gold equivalent and gold, respectively for the quarter. The Company voluntary shutdown operations for 12 days in Q1 FY2020 and resumed operations on 3^rd April. The Group’s New Afton Mine delivered production of 48,446 ounces, 15,494 ounces and 16.9 million pounds of gold equivalent, gold and copper, respectively in Q2 2020. NGD signed a definitive agreement with Artemis Gold to dissociate Blackwater Project for cash consideration of CAD 190 million, an equity stake of CAD 20 million in Artemis and a gold stream of 8%.

Financial Highlights – First Quarter of the Financial Year 2020 (31^st March 2020, USD, million)

(Source: Quarterly Report, Company Website) 

In the first quarter of the financial year 2020, due to lower revenue from Rainy River mine and New Afton mine for the period, the revenue stood at USD 142.3 million (Q1 FY2019: USD 167.9 million). Due to increased operating expenses for the period, the Group reported an operating loss of USD 5.9 million in Q1 FY2020 (Q1 FY2019: operating profit of USD 13.8 million). The net loss stood at USD 28.3 million in the first quarter of the financial year 2020 (Q1 FY2019: net loss of USD 13.4 million). The Group’s basic and diluted loss per share stood at $0.04 in the first quarter of the financial year 2020 versus a basic and diluted loss per share of $0.02 in Q1 FY2019.

Share Price Performance

Daily Chart as of 17 July 2020, after the market close (Source: Refinitiv, Thomson Reuters) 

New Gold Inc shares closed at CAD 1.87 at the time of writing after the market close on 17 July 2020. Stock's 52 weeks High is CAD 2.07 and Low is CAD 0.55.

Key Risks

The commodity market is extremely volatile and on the lower side, which could impact the Company’s financial performance as well as operational performance. The overall business of the Company can be impacted by the changing regulations and policies by the Government.

Conclusion

The company has shown a decline in financial performance in the first quarter of the financial year 2020. The top-line and the bottom-line performance has declined, with profitability remained in the negative zone. The recent increase in the gold prices in the global markets will improve financial performance and bring operational stability. The Group operations are impacted by the outbreak of covid-19 pandemic and have been focusing on strengthening its balance sheet and reducing its costs to preserve cash. With the resumption of activities at Rainy River Mine, the production will increase as soon the operations will reach to normal capacity. The Group’s recent decision to divest the Blackwater Project will fetch additional cash which can be used to meet working capital requirements.

Based on the above rationale, we have given a “Hold” recommendation at the closing price of CAD 1.87 (as on 17 July 2020).

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.