Ritchie Bros. Auctioneer

Ritchie Bros. Auctioneer (TSX: RBA) started its operations in 1958 as a live auctioneer of industrial equipment. It has greatly expanded its operations to include the sale of construction, agricultural, oilfield, and transportation equipment in a variety of venues. It now operates 40 live auction sites in 13 countries and online marketplaces, including IronPlanet, Marketplace-E, and GovPlanet.

Key Highlights

• Healthy Consolidated Performance: Despite the headwinds the company saw a decisive contribution to GTV growth across all geographic regions and channels and demonstrated the growth in the third quarter; where the total revenue increased by 14%, operating income grew by 68%, and Adjusted net income registered a soldi growth of 92%.

Source: Company

• Strong Operating Free Cash Flows:In Q3 2020, the company managed to generate operating free cash flows of USD 260 million. The company has generated cumulative OFCF of over USD 1.1 billion through agile management and operational efficiency since 2015.

Source: Company

• Robust liquidity:At the end of the third quarter, the group held a solid balance sheet and a strong liquidity position. As of September 30, 2020, the group have USD 470.3 million of unrestricted cash, and recently they have amended and extended its credit facilities totalling USD 630.0 million to expire in October 2023.

Financial Overview of Q3 2020

Source: Company

• Total revenue in Q3 2020 increased 14% to USD 331.5 million, compared to USD 289.8 million in Q3 2019. The rise in revenue was primarily due to strong executions, which helped in generating higher GTV across all territories. Service revenue in Q3 2020 increased 25% to USD222.7 million, compared to USD 178.5 million in Q3 2019. Inventory sales revenue in Q3 2020 decreased 2% to USD 108.9 million, compared to USD 111.2 million in Q3 2019.
• Total SG&A expenses posted by the company in Q3 2020 increased 18% to USD 110.2 million, compared to USD 93.6 million in Q3 2019.
• Operating income in Q3 2020 increased 68% to USD 67.4 million, compared to USD 249.6 million in Q3 2019. The reason behind increased operating income is purely rising revenue.
• Net income increased 80% to USD 45.5 million, compared to USD 25.2 million in Q3 2019. Net income raised primarily due to the higher operating income, lower interest expense, and partially offset by the increase in the effective tax rate.

Risks associated with investment

Because of Covid-19 pandemic and social distancing restrictions, the company cancelled few live auctions in the recent past, any further outbreak or prolonged measures might lead to further cancellation of such events. Any such scenario would hamper financial performance of the company.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

Amidst the current economic cycle, wherein most of the sectors witnessed a decline in the sales due to weak consumer sentiment, the Company has reported growth in operating numbers and has retained its overall performance, which is commendable. Furthermore, 100% of transactions have been moved online; thus, the Company will continue to leverage all the tools in their digital and technology toolbox. We believe this could attract a more significant number of customers, increasing their GTV, hence the Company would recognize more revenue. Recently, the company has authorized a share repurchase program for the repurchase of up to USD 100 million of common shares over the next 12 months; we believe this reflects the group's confidence in their business, operations, and healthy future. Therefore, based on the above rationale and valuation done using the above methodology, we have given a “Hold” rating at the closing price of CAD 80.23 on January 22, 2021. We have considered Stantec Inc, WSP Global Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Transcontinental Inc.

Transcontinental Inc. (TSX: TCL.A) is a Canadian printer and flexible packaging provider that operates in three segments: packaging, printing, and others. Its packaging segment features the production of different plastic products geared toward consumer goods.

Key Updates:

• Improved Sequential performance: Despite the ongoing downturn, the group has reported improved revenue and posted Q4FY20 revenue of CAD 655.7 million, higher than CAD 587.4 million in Q3FY20. The group reported strong momentum from its printing segment (CAD 283.5 million versus CAD 223.8 million in Q3FY20), which is encouraging. Adjusted net earnings per share improved to CAD 0.59 per share from CAD 0.56 per share in the previous quarter, aided by further optimization of the company’s platform by implementing cost reduction measures. We expect the above growth to continue in the coming days supported by resilient performance from the printing sector.              

Source: Company Reports

• An income Play: Over the years, the group reported a stable dividend payment across economic cycles, which indicates operational resiliency, consistent cash flows etc. At the last closing price of CAD 20.86, the stock was offering a dividend yield of ~4.317%, higher than the TSX Composite yield of ~3.32%. The group paid a higher dividend of CAD 77.9 million during FY20, as compared to CAD 76 million in FY19.

Source: Company Reports

• Impressive Guidance: The group expects organic growth in FY21 aided by stable retail supply for food and everyday consumer product, which would further lead to organic growth in FY21, which is a key positive. Despite a few hiccups, the company seems confident to generate significant cash flows from all its segments.

FY20 Financial Highlights:

• The group announced its yearly results, wherein the group posted revenue of CAD 2,574 million, as compared to CAD 3,038.8 million in FY19. This decrease was majorly due to lower volume from the Printing Sector, which was severely affected by the COVID-19 pandemic since April 2020 combined with the disposal of the paper packaging operations during Q1FY20.
• Operating earnings stood at CAD 241.4 million, as compared to CAD 309.5 million in pcp. The decline was due to lower revenue, partially offset by lower operating expenses (CAD 2,074.6 million versus CAD 2,551.3 million in FY19).
• The group reported net earnings of CAD 131.8 million, as compared to CAD 166.1 million, a year ago.

FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to a considerable increase in the price of resin, the corporation might witness a slide in the profitability in Q1FY21. Moreover, the group might witness a decline in order inflow from several clients, due to an adverse impact in their respective operations on account of COVID 19 pandemic.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation:

Going forward, the group seek to reduce its net indebtedness and expects the desired flexibility to continue growing through strategic and targeted acquisitions. Moreover, the company reported a better than industry median margin during FY20. EBITDA margin and net margin during FY20 stood at 17.9% and 5.1%, respectively, higher than the industry median of 15.5% and 4.3% in FY19. Moreover, the debt component has reduced to CAD 1,174.9 million, from CAD 1,381.9 million in FY19, which is encouraging and augurs well for lower finance costs and improved profitability. The stock closed above the 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish pattern. We have valued the stock using Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Quebecor Inc, Corus Entertainment Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 20.85 on January 22, 2021. 

TCL.A Daily Technical Chart (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.