FirstService Corporation

FirstService Corporation (TSX: FSV) operates in the essential outsourced property services sector, serving its customers through two industry-leading service platforms, namely FirstService Residential and FirstService Brands. The company caters to the North American market and manages thousands of residential communities, including high, medium and low-rise condominiums and co-operatives.

Key Highlights:

• Reduction in Debt: The company has reduced its total debt consistently during the last few quarters, which is a key positive. A lower debt is a healthy sign and enhances financial flexibility. Notably, the group reported total debt of USD 552.3 million, depicting a 26% decline from Q1FY20. Due to a lower debt balance, the group reported a lower net interest expense of USD 4.187 million in Q1FY21, v/s USD 8.887 million in pcp. 

• Sluggish Margins: Though the company has reduced its debt in the recent past, FSV’s profitability margins have remained lower than the industry median, which is a key concern for the company. During Q1FY21, the company reported its gross margin and EBITDA margin at 31% and 8%, respectively, lower than the industry median of 39.6% and 12.9%, respectively. Moreover, the operating margin during the period stood at 4.8% in Q1FY21, lower than 6.1% of the industry median.                         

Source: Refinitiv (Thomson Reuters)

• Balanced Portfolio: The company has a well-balanced portfolio in terms of revenue-mix or geographic presence, which is a key positive and removes the risk of dependence on a single segment.

Source: Company Presentation

• Management Update: On May 11, 2021, the group confirmed the appointment of Steve H. Grimshaw to its Board of Directors. 

Q1FY21 Financial Highlights:

• FSV announced quarterly result, wherein the group reported revenues of USD 711.066 million as compared to USD 633.831 million Q1FY20. The increase was driven by solid growth from the company’s FirstService Brands segment (USD 360.586 million v/s USD 294.168 million in pcp) coupled with a decent performance from FirstService Residential segment (USD 350.480 million v/s USD 339.663 million in pcp).
• Operating earnings surged to USD 33.882 million from USD 15.984 million in the previous corresponding period (pcp). The increase was primarily due to elevated revenues, partially offset by an increase in cost of revenues (USD 490.812 million v/s USD 435.149 million in pcp) and higher Selling, general and administrative expenses (USD 163.246 million v/s USD 158.786 million in pcp).
• The company reported its net earnings of USD 23.843 million, significantly higher than USD 5.780 million in pcp, supported by higher operating earnings and lower net interest expense (USD 4.187 million v/s USD 8.887 million in pcp).
• The company posted a cash balance of USD 152.712 million, while total assets were recorded at USD 2,170.763 million.

Income Statement Highlights (Source: Company Report)

Risks: The company’s operations might be hindered due to an increase in the input costs such as cost of sales, higher SG&A expenses.

Stock Recommendation:

The company is a leader in large and highly fragmented essential, outsourced property services markets and has reported a ~17% and ~22% CAGR growth in revenues and Adjusted EBITDA during FY15 to FY20, which is impressive.

Source: Company Presentation

On the valuation front, the stock is trading at forward EV to EBITDA multiple of 22.6x, which is higher than the industry median of 18.3x. Hence, considering the aforesaid facts, we recommend a ‘Watch’ rating on the stock at the last closing price of CAD 189.14 on May 13, 2021.

One-year Price Chart (as on May 13, 2021). Source: Refinitiv (Thomson Reuters)

AutoCanada Inc.

AutoCanada Inc. (TSX: ACQ) operates car dealerships in Canada, and the company offers new and used vehicles, spare parts, maintenance services, and customer financing. 

Key Updates:

• Improved Cash from operations amidst Economic Turbulence: In Q1FY21, the company reported a drastic improvement in its cash from operations, aided by impressive net income, as compared to a net loss in Q1FY20. Cash from operations stood at CAD 20.5 million compared to CAD 7.3 million. 

• Decent Industry Dynamics: Over the last two decades, the Canadian vehicle industry performed reasonably well, reporting a 2% CAGR growth from 2000 to 2020. The stable performance was led by an increase in first-time buyers during the period. Moreover, the Canadian market is witnessing strong momentum from the light vehicles segment in the recent past, while it is expected to touch 1.9 million of sales in FY21, which reflects a ~19% jump over FY20. 

Source: Company Presentation

• Issuance of senior notes: On April 22, 2021, the company successfully closed the issuance of senior notes amounting to CAD 125 million, due on February 11, 2025. These funds would be used for the repayment of its existing debt and for the general corporate expenses.

Q1FY21 Financial Highlights:

• ACQ announced its quarterly result, wherein the company posted revenue of CAD 969.824 million, v/s CAD 708.826 million in the previous corresponding period (pcp). The increase was aided by higher vehicles sales of 18,707 units, reflecting an increase of 4,972 units or 36.2% on y-o-y basis.
• The period was marked by higher cost of sales (CAD 802.188 million v/s CAD 591.528 million in pcp) and higher operating expense (CAD 127.948 million v/s CAD 116.700 million in pcp).
• The company reported an operating profit of CAD 41.664 million, as compared to a loss of CAD 28.948 million in pcp. The company reported a loss in the previous corresponding period due to an additional cost of CAD 31.545 million related to impairment of non-financial assets.
• The company reported its net income at CAD 21.334 million, as compared to a net loss of CAD 46.853 million in Q1FY20.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Due to any unprecedented events, the automobile industry might witness a lower demand which may impact the company’s overall performance. Moreover, a change in consumer preference might lead to a decline in sales.

Valuation Methodology (Illustrative): P/E based valuation.

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

Stock Recommendation:

The company has a dedicated Finance and insurance (F&I) team with an in-house training team, which trains the company’s growing dealership network on standardized product portfolio and sales process and has given better than expected outcomes in the recent past. Notably, the company showed ten consecutive quarters of year-over-year growth within the Same Store F&I Gross Profit / Retail Unit, which is encouraging.

Source: Company Presentation

The company operates across a large and highly fragmented Canadian Market and reported consistent organic growth in the recent past and has gained First Mover Advantage with the Canadian Digital Retail Platform. We have valued the stock using the P/E based relative valuation method and have arrived at a low single-digit upside (in percentage terms). For the said purposes, we have considered peers like Intertape Polymer Group Inc, Aecon Group Inc etc. Considering the aforesaid facts, we recommend a ‘Watch’ rating on the stock at the last closing price of CAD 46.26 on May 13, 2021 and would advise investors to wait for a better entry point.

One-Year Price Chart (as on May 13, 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.