Gildan Activewear Inc.

Gildan Activewear Inc. (TSX: GIL) is a vertically integrated designer and manufacturer of basic apparel, including T-shirts, underwear, socks, and hosiery. The Company’s primary market constitutes the sale of blank T-shirts to wholesalers and printwear. Through its strong retail and direct-to-customer distributions, the group sells branded clothing like Gildan, American Apparel, Comfort Colors, and Gold Toe.

Q2FY20 Financial Highlights: GIL announced its second-quarter results, wherein the Company posted a ~71.3% plunge in the topline to USD 229.7 million as compared to the previous corresponding quarter. The decline was primarily attributable to lower sales volume due to the considerable slide in consumer demand coupled with the impact of significant distributor inventory destocking in imprintables, adverse product-mix, and higher promotional discounting in imprintables. The Company posted a gross loss of USD 148.5 million as compared to a gross profit of USD 222.8 million in the previous corresponding quarter, majorly due to lower sales coupled with higher manufacturing idling costs, inventory provisions, and the impact of unwinding excess derivative hedges and cotton commitments. The Company made an operating loss of USD 236.1 million as compared to an operating profit of USD 114.1 million in the previous corresponding period (pcp), due to a gross loss and higher restructuring and acquisition-related costs, partially offset by a decline in SG&A expense. Adjusted EBITDA loss, during the quarter, stood at USD 137.2 million as compared to a profit of USD 174.5 million in pcp. The quarter witnessed a dip in SG&A expenses (USD 64.9 million vs USD 92 million) due to lower compensation, lower volume-driven distribution costs, and cost containment efforts. The Company’s net loss stood at USD 249.7 million as compared to net earnings of USD 99.7 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Lack of promotional and sporting events might dampen the demand for the company’s core products, particularly in the imprintables channel.

Valuation Methodology: EV/Sales Based (Illustrative)

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

Stock Recommendation: The stock of GIL corrected ~38% so far this year. The group reported a dismal quarterly result due to a demand destruction scenario within the clothing and apparel segments coupled with a pile-up of inventories and production shut down. The online segment reported decent sales growth due to the closure of retail stores, which is a key positive. Furthermore, the undergarment segment witnessed a strong momentum and was up by ~24% on y-o-y basis, despite a weak industry scenario. The Business has witnessed a demand pick-up in the recent past, however, to boost its top line, the company is opting for promotional activities including discounts, which has impacted the cash inflow and margins. The company mentioned that POS in the mass and online channels continue to perform in the strong double-digit range driving this improvement, while POS within certain mid-tier retailers such as department stores, national chains and sports specialty are still down in the 20% to 30% range compared to prior-year levels. While the signs of recovery are encouraging, the trajectory of the pandemic remains uncertain given recent increases in COVID-19 cases in various regions and a renewed focus on social distancing measures. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a single-digit downside potential (in % terms). For the said purpose, we have considered HanesBrands Inc, Canada Goose Holdings Inc and Aritzia Inc etc., as a peer group. Hence, considering the aforesaid facts, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 23.77 on July 31, 2020.

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

Talon Metals Corp.

Talon Metals Corp. (TSX: TLO) is a mineral exploration company. It is engaged in the exploration and development of the Tamarack nickel-copper-cobalt project in Minnesota, United States of America. The company operates in one business segment, namely, mineral exploration. Talon Metals also holds interests in Trairao Project in Brazil.

Key Highlights:

• The Group announced that it had commissioned the next phase of exploration at the Tamarack Project as well as hydromet testing of recently produced nickel concentrates. In the coming days, the company would indulge in the refining process from the identified conductors which have the possibility to produce high-grade nickel and copper mineralization outside of the company's resource area. The company also announced the preliminary results of its flowsheet development to efficiently produce nickel sulphates for the EV market. A nickel flotation concentrate was processed successfully to extract over 99% of the contained Ni and Co and approximately 88% of the Cu that was not captured in the separate copper concentrate.

• Earlier, the company has provided an update on the Tamarack Nickel-Copper-Cobalt project, which includes only 4.9 million tonnes of material in the proposed mine plan. 3.1 million tonnes of material was excluded from the company's proposed mine plan, as the development of a representative flowsheet was still in progress by the company.

Q1FY20 Financial Highlights: For the period ended March 31, 2020, TLO reported a net loss of CAD 0.528 million, as compared to a net loss of CAD 2.830 million in the previous corresponding period (pcp). Total expense stood at CAD 0.541 million, which includes salaries, benefits, consulting and Brazil administration of CAD 0.212 million; listing, filing and shareholder communications of CAD 0.556 million; Loss on revaluation of royalty put option of CAD 0.154 million; Board fees of CAD 0.21 million, and Professional Fess of CAD 0.555million etc. The company recorded interest income of CAD 0.014 million as compared to CAD 700 in pcp. The Group ended the quarter with cash and cash equivalent of CAD 2.953 million, while total assets stood at CAD 64.147million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Key Risks: The group is in the preliminary stage of nickel-copper-cobalt minerals and the exact time needed to derive revenue is unknown. Further, any setback to project timeline or negative outcome of feasibility studies would dent the future prospects. 

Stock Recommendation: The stock of TLO appreciated handsomely and reported a 170% and 92% return in the last three months and six months, respectively. The company is planning to create a nickel sulphate complex at Tamarack, which is likely to be a low-cost operation as well. Further, with the recent metallurgical test results, the company is optimistic that the large body of mineralization above the high-grade massive sulphide unit (the 138 Zone) can be included in future mine plans, which is impressive. However, the company is in the early stage, and the production has not been commenced. Further, the company is yet to report revenue, and any setback to the project timeline would dent the future prospect. The group made some progress and initial studies have suggested positive outcome and the stock has soared ~74% in the last one month. We believe all the positive are priced in at the current trading level. On the valuation front, the stock is trading at TTM P/BV multiple of 2.4x, which is significantly higher than the industry (metals and mining) median of 0.9x. Hence, considering the aforementioned facts, we recommend a ‘Watch’ stance on the stock at the closing price of CAD 0.27 on July 31, 2020.

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

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