KeyStone’s Stock Talk Podcast Episode 155
This week, we get back to our Case For, Case Against Debates. He company in our crosshairs is Equitable Group Inc. (EQB:TSX), which with nearly three hundred thousand Canadians clients calls itself Canada’s Challenger Bank™. Equitable Bank has grown to become the country’s eighth largest independent Schedule I bank. We flipped a coin (at least Aaron says he did) and Mr. Dunn will take the Case For, while Brennan takes the Case Against this growing financial service firm. I will sit in as judge, jury and executioner.
Our YSOT this week came in from a listener on MAV Beauty Brands Inc. (MAV:TSX-V), which operates a diversified portfolio of four complementary personal care brands – Marc Anthony, Renpure, Cake Beauty and The Mane Choice – offering premium quality hair care, body care and beauty products. The listener asks us our take on the stock which we reviewed on a past show and saw it pricy. With the stock selling off, the listener wonders if it offers value today.
The first and only English debate is tonight – Live coverage will begin at 9 p.m. ET – 6 p.m. Pacific.
Equitable Group Inc. (EQB:TSX)
Market Cap: $2.58 Billion
What Does Equitable Do?
Equitable Group Inc. provides residential and commercial mortgage lending solutions to customers across Canada, predominantly in the single-family, non-prime segment. The company operates through its wholly owned subsidiary, Equitable Bank.
Numbers look good – multiple on the stock looks good.
FOR & AGAINST
Equitable Group Inc. (EQB:TSX)
Current Price: $154.24
Market Cap: $2.6 Billion
Equitable Group Inc. (TSX: EQB and EQB.PR.C) operates through its wholly-owned subsidiary, Equitable Bank. Canada’s eighth-largest independent Schedule I bank is measured by market capitalization.
- The credit rating agency DBRS Morningstar confirmed EQ Bank’s long-term ratings at BBB. Which just qualifies as “investment grade”. Whereas TD and RBC enjoy ratings of AA because of their credit fundamentals and global diversification.
- Equitable’s loan portfolio primarily consists of alternative mortgages (which are considered riskier). As we know, the Canadian housing market has performed very well, which Equitable has benefitted from. If there is a housing downturn, EQ bank will likely be hit harder than other Canadian banks.
- Since early August we have seen President and CEO, Andrew Moor exercise options totaling over 11,000 shares and simultaneously sell them into the market. Potentially indicating that the stock is overvalued in its current range.
- It trades with a trailing P/E multiple of 9x which is by no means cheap but is likely close to fair value considering its growth and relative size compared to other Schedule I banks.
- Equitable Group is the 8th largest bank in Canada and also a fintech innovator with its digital EQ Bank, founded in 2016.
- Tremendous track record of financial performance – record Q2 results with earnings per share up 35%.
- What’s even more impressive is that Equitable’s EPS was up 3% in 2020 while all the big 6 banks in Canada reported significant EPS declines – on average down 16%.
- Return on equity of 16.5% and Tier 1 capital ratio of 14.4% are both strong.
- The stock trades at less than 10 times earnings which is a discount to the big 6 peer group.
- Finally, the focus on fintech and digital banking continues bear fruit with EQ Bank digital customers up 79% year-over-year (to 222,000) and deposits up 99% to over $6.5 billion.
MAV Beauty Brands Inc. (MAV:TSX-V)
Market Cap: $ 86.31 Million
What Does MAV Do?
A global personal care platform focused on acquiring great independent brands and helping these brands to scale and win market share. We have built an operating platform to build brands through expanded distribution, innovation, and marketing. Today, we have a diversified portfolio of four complementary personal care brands – Marc Anthony, Renpure, Cake Beauty and The Mane Choice – offering premium quality hair care, body care and beauty products. These products are sold in over 25 countries around the world and in more than 100 of the world’s largest retailers.
Q2 2021 Results:
- Q2 2021 revenue decreased by 1.8% to $29.1 million, compared to $29.6 million in Q2 2020.
- Adjusted EBITDA decreased to $3.8 million in Q2 2021, from $8.1 million in Q2 2020, mainly due to lower gross profit margin, higher selling and administrative costs, and lower revenues.
- Adjusted Free Cash Flow was $2.3 million in Q2 2021, compared to $7.1 million in Q2 2020.
At quarter-end, net debt was $123.2 million, and cash was $17.8 million.
Q2 revenues down slightly, adjusted free cash flow dropped significantly from $7.1 million to $2.2 million and adjusted EPS dropped from $0.10 per share to $0.02.
Commenting on the poor Q2 number quarter management stated they were disappointed with our top and bottom-line but stated there were many reasons to be optimistic about the future – then stressed the value of the 4 core brands. We find that a bit too non-specific. The great brands were present in the poor quarter, so it appears there are some execution issues and more.
As a result, change is coming at MAV the company a new President & CEO on August 17th. The company made the decision to streamline its product collections to create a more efficient assortment of products during the quarter, which resulted in increased inventory-related provisions, and clearance of non-core, lower-margin products. So, there was a lot of noise in the numbers which likely made them look worse than they actually were – but they were still not good.
MAV has potentially given the acquisition-related revenue growth, but the company has leveraged upon its acquisition journey with roughly $140 million in debt – a high level for a business with an $86 million market cap.
It has become a “potential” turnaround story. Given the weak Q2 results, the refocussing, new incoming CEO, limited organic growth, and higher debt levels, we continue to pass on MAV despite the fact its share price has dropped over the past 3 years from over $12 to $2.20 today.