Domtar Corporation

Domtar Corporation (TSX: UFS) is a leading provider of a wide variety of fiber-based products including communication, specialty and packaging papers, market pulp and absorbent hygiene products.

Recently, the Company informed the successfull completion of a surveillance audit on the Wabigoon Forest for the new Forest Stewardship Council (FSC^®) National Standard for Canada. The audit occurred during July 2020 with the auditor’s recommendation for certification to be maintained under the new Canadian standard.

Q2FY20 Financial Highlights: Domtar reported its quarterly results, wherein the Company posted consolidated sales stood at USD 1,012 million, as compared to USD 1,317 million in Q2FY19. Revenue from the Pulp and Paper segment, which constitutes the majority of the revenue, slide to USD 802 million as compared to USD 1,106 million in pcp. The segment results were dampened due to lower volume and unfavorable productivity. The Group’s Operating income stood at USD 14 million in the second quarter of 2020, significantly lower than the operating income of USD 34 million in pcp. Meanwhile, the quarter was marked by lower maintenance costs and lower salaries and wages, supported by wage subsidies, a decline in the selling, general and administrative expenses, lower raw material costs, favorable exchange rates and lower fixed and other costs. The Company’s net earnings, for the quarter, stood at USD 19 million, as compared to USD 18 million, a year ago, supported by an income tax benefit amounting CAD 15 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company posted a tepid result from its frontline segment i.e. pulp and paper segment. To improve the Company’s performance, the above segment has to report improved numbers, which might be a key challenge for the Company looking at the current economic jolt.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation: Due to a depressed sectoral scenario within the Pulp and paper segment on account of demand destruction scenario due to COVID 19 pandemic, the stock of UFS fell ~23% on YTD basis. The company expect the overall environment to continue to be challenging. In Paper, the group expect demand to remain weak, with some incremental recovery expected in quarter three and towards year-end. The group also expect near-term pulp markets to be impacted by seasonal softness, elevated global inventories, and weak demand trends from paper markets. Personal Care will continue to benefit from productivity gains and the impact from new customer wins. Overall raw material costs are expected to remain stable. Furthermore, the Company has implemented a cost reduction program which targets USD 200 million of annualized cost savings for FY21, augurs well for the margin improvement. On the liquidity front, the Company has ample liquidity of ~USD 906 million, which seems to be sufficient to surpass the current economic downturn. We have valued the stock using EV/EBITDA based relative valuation method and have arrived at a target downside of single digit (in percentage terms). For the said purposes, we have considered Westrock Co, International Paper Co and Sonoco Products Co etc., as a peer group. Hence, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 38.25 on August 26, 2020.

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

Great Canadian Gaming Corporation

Great Canadian Gaming Corporation (TSX: GC) is a gaming, entertainment, and hospitality company that operates across Canada and the United States. The group operates through 16,000 slot machines, 575 table games, 71 dining amenities across more than 500 hotels. The group has more than 25 gaming, entertainment and hospitality facilities in Ontario, British Columbia, New Brunswick, and Nova Scotia.

Q2FY20 Financial Highlights: GC announced its second quarter results, wherein the Company posted revenue of CAD 31 million, reflecting a stiff fall of ~85% on y-o-y basis. The steep decline was primarily attributed to business closure as a result of the temporary suspensions since mid of March 2020 due to the pandemic. The Company reported closure of its operations across 25 locations which negatively impacted the performance of the business. Adjusted EBITDA plunged 79% to CAD 31.8 million from the previous corresponding quarter. The Company posted a net loss of CAD 36.4 million, as compared to a net profit of CAD 122.2 million in the previous corresponding period (pcp). The Company ended the quarter with a cash balance of CAD 498.2 million while total assets stood at CAD 3,124.7 million. The Company’s long-term debt increased by 42% from FY19 to CAD 1,236.1 million.

Q2FY20 Financial Snapshot (Source: Company Reports)

Risks:  The company's operation is entirely dependent upon the Government's mandate on reopening of the casinos. Hence, the company might witness a drastic hindrance in its operations, if the ban is not lifted.

Stock Recommendation: As gaming and leisure segment is categorized under the 'non-essentials', most of the businesses within the segment took a hit, and it is reflected in the group's stock price. The stock of GC corrected ~34% so far this year. During the last quarter, the company reported Free Cash Out Flow of CAD 123.4 million, which has been met via the use of credit facilities and cash balances. Certain provinces have now approved casinos to reopen as part of their phased reopening plans, and the group is working diligently on determining the reopening timelines and dates. The company expects a slow recovery of its operations as there will be a capacity restriction in order to maintain the safety precautions. The Business does not fall under the 'essential' and might witness lower traffic on account of decreasing consumer spending and lower-income, due to the challenging environment. Further, traffic might be on the lower side as people are likely to follow social distancing measures and may avoid public places. The company has restarted key capital projects in Ontario, as Government of Ontario's lifted its ban on non-critical construction projects. Further, the company's long-term debt increased significantly from FY19 end. Increase in debt level in order to meet the working capital needs would likely to hinder the company's financial flexibility. The stock of GC is trading at a higher EV to EBITDA multiple of 14.6x on NTM basis, as compared to the industry (Hotels & Entertainment Services) median of 11.9x. Hence, considering the aforesaid facts, valuations, and current trading levels, we recommend a 'Watch' stance on the stock at the closing market price of CAD 28.39 on August 27, 2020.

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

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