Canadian Pacific Railway Limited

Canadian Pacific Railway Limited (TSX: CP) is a transcontinental railway in Canada and the United States with direct links to major ports on the west and east coasts.

Key Updates:

• Better than industry Margins: The company reported a strong operational efficiency in the recent past. During 4QFY20, gross margin stood at 88.9%, higher than industry median of 60% while the EBITDA margin came in at 55.9% compared to 24.5% industry median. Net margin stood at 39.9%, significantly above the industry median of 8.5%.
• Sequential Growth: During Q4FY20, the company reported revenue and gross profit of CAD 2,012 million and CAD 1,789 million, respectively, higher than CAD 1,863 million and CAD 1,670 million in Q3FY20. Operating income stood at CAD 928 million, reflecting a growth of 19.1% on q-o-q basis.
• Balanced Portfolio: The company has a balanced portfolio in terms of revenue-mix and as well as geographical presence. Thus, it helps to reduce the risk of dependence on a particular segment, which is a key positive.                                                                                         

Source: Company Report

• Acquisition of Kansas City Southern: The company entered into a definitive agreement of Kansas City Southern at a cash transaction representing an enterprise value of approximately USD 29 billion, including CAD 3.8 billion of outstanding KCS debt. The above transaction is valued at CAD 275 per share. On completion of the transaction, each common shareholder of Kansas City Southern would receive 0.489 of CP’s share and CAD 90 cash for each common share held. Recently, shareholder rights law firm Johnson Fistel, LLP has launched an investigation into whether the board members of Kansas City Southern breached their fiduciary duties in connection with the above transaction.

Q4FY20 Financial Highlights:

• CP announced its quarterly result, wherein the company posted revenue of CAD 2,012 million, reflecting a YoY decline of 3%.
• Total operating expense stood lower at CAD 1,084 million, v/s CAD 1,179 million in Q4FY19, primarily attributable to a decrease in fuel costs, lower purchase services and other costs, while higher compensation and benefits remained a drag.
• The company posted a higher operating income of CAD 928 million, v/s CAD 890 million, thanks to the lower operating expenses.
• Net income was recorded at CAD 802 million as compared to CAD 664 million in Q4FY19.
• The group posted cash and cash equivalent of CAD 147 million, while total assets were recorded at CAD 23,640 million.

Q4FY20 Income Statement Highlights (Source: Company Report)

Risks: Change in the demand dynamics of the commodities and higher fuel costs would take a toll on the company’s overall performance.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation:

The company has a resilient business model, driven by the diverse book of business, which creates a powerful base to drive sustainable growth. Moreover, the company is focusing on innovations with its long-term partners to help them win in the marketplace. Moreover, the company has a strong footprint of 13,000 miles rail network, with the shortest routes to connect major centers and ability to extend reach. We have valued the stock using Price to Cash Flow based relative valuation method and arrived at a single digit downside (in percentage terms). For the said purpose, we have considered Canadian National Railway Co, Union Pacific Corp etc., as a peer group. Considering the aforesaid facts, we give a ‘Watch’ stance on the stock at the closing price of CAD 450.08 on March 26, 2021 and suggests investors to wait for the better entry point.

One-Year Price Chart (as on March 26, 2021). Source: Refinitiv (Thomson Reuters)

Boyd Group Services Inc.

Boyd Group Services Inc. (TSX: BYD) is a personal services company that provides auto body and auto glass repair services at its portfolio of facilities located across the United States and Canada. 

Key Highlights:

• Dividend update: The group announced a quarterly dividend of CAD 0.141 per common share, payable on April 28, 2021.
• Significant Reduction in Total Debt: The company has successfully reduced the total debt to CAD 779.4 million in Q4FY20, reflecting a decline of 8.63% and 40.10% from Q3FY20 and Q2FY20, respectively. The decline is commendable, looking at the tighter restrictions and uncertain economic environment.
• Long-term prospect remains positive: We believe the long-term outlook of the business remains positive, driven by the company’s constant store expansion strategy coupled with acquisitions. Moreover, the group is focusing doubling the size of its operations till FY25. However, on the flip side, the near-term outlook remains tepid due to slower economic activities across North America. 

FY20 Financial Highlights:

Source: Company Filings

• BYD announced its full-year result, wherein the company posted sales of CAD 2,089.115 million, reflecting a slide of 8.5% on y-o-y basis while the same-store-sales down YoY by 15.6% to CAD 1,771.294 million.
• Gross profit stood at CAD 961.930 million, lower from CAD 1,036.480 million in FY19, due to a lower revenue, partially offset by lower cost of sales (CAD 1,127.185 million v/s CAD 1,246.845 million in FY19). However, the gross margin stood marginally higher at 46.0%, v/s 45.4% in FY19.
• Earnings before income taxes stood lower at CAD 77.471 million, as compared to CAD 93.549 million in the previous year. The period was marked by lower operating expenses (CAD 668.379 million v/s CAD 716.608 million in FY19), partially offset by higher depreciation expense and an increase in finance costs.
• Net earnings stood lower CAD 57.734 million v/s CAD 64.147 million in FY19.
• The company reported a cash balance of CAD 77.718 million, while total assets were recorded at CAD 2,000.905 million. 

Risks: Surge in COVID-19 infections and unusual weather events across different places would lead to a reduction in the demand for the company’s product and are likely to challenge the company’s sales volume. Moreover, a surge in operating expenses and personnel costs, coupled with continued reduced demand for services, would hamper the company’s financial performance.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation:

The group added 54 locations, including 11 intake centers in FY20 and reported a positive cash flows from operations of CAD 307.0 million in FY20 v/s CAD 295.9 million in FY19. The North American collision repair industry remains highly fragmented and hence provides attractive opportunities for industry leaders to build value through focused consolidation and economies of scale. On the flipside, Adjusted EBITDA declined 8.2% on y-o-y basis to CAD 293.6 million in FY20, including the benefit of CAD 16.9 million from Canada Emergency Subsidy (CEWS). Moreover, we believe that the operations would take time to return to normalcy. We have valued the stock using Price to Cash Flow based relative valuation method and arrived at a single digit (in percentage terms) upside. We have considered industry median as a proxy to target multiple. Hence, we give a ‘Watch’ stance on the stock at the closing price of CAD 225.78 on March 26, 2021 and suggest the investors to wait for the better entry point.

One-Year Price Chart (as on March 26, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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