KeyStone’s Your Stock Our Take: Premium Brands (PBH:TSX), Dog: is Encana Corporation (ECA:TSX) and Dog: Stornoway Diamond Corporation (SWY:TSX).
This week in our Your Stock, Our Take segment we look at Premium Brands (PBH:TSX), owns a broad range of leading specialty food manufacturing and differentiated food distribution businesses with operations across Canada and the United States. A listener noted that the stock had a nice move up this week after a very poor year of performance. The listener has been watching the company for a while and wondering if now is the time to pick up a position. Last week we had 2 Stars, this week we have two Dogs. Our first Dog of the week is Encana Corporation (ECA:TSX), an independent oil and gas producer (43% oil and natural gas liquids and 57% natural gas) with key assets in the Permian, Eagle Ford, Montney, and Duvernay areas. The stock is off 21% this month as energy prices have dropped just under 15%. Our Dog of the week is Stornoway Diamond Corporation (SWY:TSX), which has dropped 50% this week and roughly 85% year-to-date. Stornoway owns a 100% interest in the Renard Mine, Québec’s first diamond mine. Unfortunately, the operation has run into some market pricing and debt issues. Dog or opportunity?
Your Stock, Our Take
Premium Brands (PBH) had a nice move up this week after a very poor year of performance in the market. I’ve been watching the company for a while and wondering if now is the time to pick up a position.
- Don – via email.
Your Stock, Our Take
Premium Brands (PBH)
Current Price: $84.43
Market Cap: $3.1 Billion
What does the company do?
Premium Brands Holdings is a food processing and distribution company with operations in 7 provinces in Canada and 6 U.S. states. The company has approximately 60 premium food brands which it distributes to over 22,000 customers.
Recent News or Other Relevant Info (if any)
Premium Brands’ shareholders have had a tough ride over the last year with the stock down nearly 30%. This is after the company was one of the top performers on the TSX in the 2 years previous to the decline.
The shares moved up about 7% on Tuesday after the company announced a $200 million investment from the Canada Pension Plan Investment Board, or CPPIB.
The proceeds of the investment will be used to help fund Premium’s long-term growth strategy. The is definitely value in having an investor like the CPPIB as a significant shareholder. It’s a vote of confidence and endorsement from one of the largest investment managers in Canada.
While we see this news as a positive, it would not, in and of itself, prompt us to be shareholders of the company. We don’t follow other investors but rather make our own decisions based on the fundamentals and growth of the respective company.
Recent Quarterly Financials
Looking at the Premium Brands recent financial performance, the results have been mixed. In their first quarter, which was reported on May 13th, revenue increased 32.8% to $776.6 million and adjusted EBITDA increased 39.9% to $60.3 million. However, in spite of this strong growth, adjusted earnings per share (EPS) declined by 16% to $0.52.
A single quarter of lower EPS is nothing to agonize about; however, we have noticed that the company’s earnings growth has been substantially lower than its growth revenue and EBITDA and at times negative when the other two financial items have grown significantly.
The company has issued strong guidance for 2019, expecting 22% growth in revenue and 27% growth in EBITDA, but we aren’t completely confident that this will translate into strong growth in earnings per share.
Another issue that we note is that the company’s debt leverage is rather high as it uses debt aggressively to fund its acquisition strategy.
Overall, we do see good long-term potential in Premium Brands but we aren’t ready to pull the trigger yet and recommend that investors buy it. We would like to see earnings growth track the increases in revenue and EBITDA better and we are a little cautious on the level of debt on the balance sheet. I think that investors who are interested in the stock could potentially take a small position here but I would not rush in and start aggressively accumulating shares. There are some risks to the short-term outlook and we are going to continue to follow the company, but we are not buyers just yet.
Stornoway Diamond Corporation (SWY:TSX)
Current Price: $0.025 ($0.20 to start the year)
Market Cap: $23.09 million
Stornoway is down 50% in the past week and 60% in the last month and 85% of its value in 2019.
What does the company do?
Canadian diamond exploration and production. Stornoway owns a 100% interest in the Renard Mine, Québec’s first diamond mine. Construction on the project commenced on July 10, 2014, and commercial production was declared on January 1, 2017. Average annual diamond production is forecast at 1.8 million carats per annum over the first 10 years of mining. Unfortunately, the operation has run into some market pricing and debt issues.
What is driving the stock lower?
Q1 2019, Stornoway reported a net loss of $48.4 million ($0.05) per share
Q1 2019 adjusted EBITDA of $13.4 million, or 25.2% of revenues, which includes an $8.9 million write-down of cash costs to bring inventory to its net realizable value. For the first quarter of 2018, adjusted EBITDA was $24.7 million, or 44.2% of revenues.
Continued downward pressure on the market price for rough diamonds has inhibited the Stornoway’s ability to generate positive free cash flow in 2019. To address this situation, the company is taking a series of significant and effective actions to preserve its liquidity, including, among other things, cost reductions of $18 million to $20 million for fiscal year 2019, to be implemented over the course of the year, and the initiation of a strategic review to consider all options available to Stornoway. The company’s management is also in active discussions with its financial partners to secure the Stornoway’s long-term financial viability.
Stornoway has 240+ million in debt and $440 million in contract liabilities. Debt to equity is well above one and the company continues to lose money. Measures are being taken to help maintain the long-term solvency of the business – but for shareholders, they may be a little late in the current pricing environment.Mining is a tough and risky business at the best of times – even when you bring a mine online and produce $50+ million in quarterly sales, when the market moves against you or it the company is managed poorly, the returns can be terrible. The current pricing environment for rough diamonds and its high debt levels have crushed free cash flow and give Stornoway the not so coveted status of our Dog of the Week.
Encana Corporation (ECA:TSX)
Current Price: $8.08
Market Cap: $11.7 billion
At market open on May 23rd, Encana stock dropped 5% from $8.71 to $8.27 and continued to drop through the day to rest at $8.08 resulting in a total drop of 7% over 24 hours. The stock is down a total of 21% over the last month.
What does the company do?
Encana is an independent oil and gas producer with key assets in the Permian, Eagle Ford, Montney, and Duvernay areas. At the end of 2018, the company reported net proven reserves of 726 million barrels of oil equivalent. Net production averaged 361 thousand barrels of oil equivalent per day in 2018, at a ratio of 43% oil and natural gas liquids and 57% natural gas.
What is driving the stock?
Around a month ago when the stock began to fall, the company released its Q1 earnings. While it reported growing revenue, earnings had fallen into losses due in part to restructuring costs and EBITDA per share had dropped significantly. The stock has fallen 21% since.
On the evening of May 22nd, the CEO of Encana, Doug Suttles, addressed the company at its annual meeting. He was quoted:
“The Montney now is the biggest area of growth in Canada – it’s where we’re focusing our attention – and if it sat in the United States it would probably be producing two, three, four times what it is producing today.”
He was also quoted saying its “ridiculous” that it takes longer to get a permit for a plant than it takes to build one
Q1 2019 compared to Q1 2018
- Revenue was $1.572 billion compared to $1.260 billion, up 25%.
- Net income was a loss of $245 million compared to a gain of $151 million.
- On a diluted per share basis, a loss of $0.20 compared to a gain of $0.16.
- Adjusted EBITDA of $2.513 billion compared to $2.479 billion, up 1%.
- On a diluted per-share basis, $2.06 compared to $2.55, down 19%.
Current Ratio: 0.74
69% of Total Assets is PP&E.
12% of Total Assets is Goodwill.
The stock has taken some hits in the last little while, with restrictions from regulatory authorities and restructuring leading to dropping profitability. Recently, this has been slightly exacerbated by comments from the CEO depicting frustration with Canadian regulations. Interestingly, these hits have actually brought the valuation into a range that, assuming the company gets through its restructuring and regulatory oversight, are actually quite affordable. The company’s debt is currently under control as well. It just very much hinges on whether the company can grow profits once again.