Mercer International Inc.

MERC Details
 
Sneak Peak in 1QFY20 Operational Highlights: Mercer International Inc. (NASDAQ: MERC) is engaged in maintaining and operating a varied pulp and paper business and provides renewable bio-based products by its dedicated teams in a safe and efficient environment. MERC announced its quarterly results for the period ended 31 March 2020, wherein the company reported total revenues of $350.6 million as compared to $483.9 million reported in the year-ago-period. Operating EBITDA for the period stood at $57 million, as compared to $123.8 million in 1QFY19. Net loss during the quarter amounted to $3.4 million as compared to net income of $51.6 million in Q1FY19. The outbreak of the COVID-19 pandemic impacted the quarterly results. During the quarter, operating income from the pulp segment declined from $93.5 million to $21.4 million, owing to lower pulp sales, which was offset by the lower per unit fiber costs and positive impact of a stronger dollar.
 

1QFY20 Key Financial Highlight (Source: Company Report)
 
Liquidity Position: At the end of 31 March 2020, the company’s cash and cash equivalents amounted to $286.5 million and total assets stood at $1.95 billion.The Board declared a quarterly dividend amounting to $0.065 per share, payable on 7 July 2020.
 
What to Expect:Despite the COVID-19 pandemic, the company expects the second quarter to witness steady pulp demand from tissue and hygiene producers. However, MERC expects a soft demand from printing and writing paper producers. 
 
Valuation Methodology:EV/EBITDA Multiple Based Relative Valuation (Illustrative)
 
  
 
EV/EBITDA Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation: The stock of MERC closed at $7.78 with a market capitalization of ~$507 million. The stock made a 52-week low and high of $6.42 and $16.77, respectively, and is currently trading at the lower band of its 52-week trading range. The stock has corrected ~6.57% and 52.83% in the last one month and one year, respectively. Debt to equity in March’20 stood at 2.54x, higher than the industry median of 0.62x. EBITDA margin for the same time period stood at 16.3%, higher than the industry median of 12%. The company remains on track to overcome the current situation and is taking necessary measures to lower its costs and working capital usage and properly managing liquidity. As a result, for FY20, MERC reduced its expected capital expenditures to ~$90 million.We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). Although the outlook for pulp industry remains challenging, the novel covid-19 scenario has led to a steady pulp demand from tissue and hygiene producers.  Hence, considering the above stated facts, valuation and current trading levels, we recommend a “Speculative Buy” rating on the stock at the closing price of $7.78, down 0.51% on 14 May 2020.

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

GrubHub Inc.

GRUB Details
 
Revenues up ~12.1% Year Over Year in 1QFY20: GrubHub Inc. (NYSE: GRUB) is considered as a top online and mobile food ordering company. The company's platform supports diners in searching for local restaurants, tracking orders and re-ordering for suitability.
 
1QFY20 Key Financial Highlights: During the quarter, revenues stood at $363 million, up 12.1% year over year. Gross Food Sales (GFS) for the quarter increased 8% year over year and came in at $1.6 billion. The company’s corporate business was negatively impacted by the COVID-19 pandemic condition as almost all its clients shifted to work-from-home models. During the quarter, active diners stood at 23.9 million, soaring ~24% year over year.  Daily Average Grubs (DAGs) came in at 516,300 in 1QFY20, down 1% year over year.Total costs & expenses increased from $314.9 million year over year to $408.9 million. Adjusted EBITDA soared a whopping ~59% from the year-ago quarter and came in at $21 million.
 

1QFY20 Key Financial Highlight (Source: Company Report)
 
Balance Sheet Highlight: The company exited 31 March 2020, with cash and cash equivalents of $560.7 million, whereas long term debt amounted to $668.2 million.Cash flow from operations stood at $37.5 million, up from $13.9 million in the year-ago period.
 
What to Expect: Grubhub intends to spend on aiding its restaurant partners to sail through the coronavirus despairs. In doing so, the company is spending on advertising, pricing, discounts, and promotions for restaurants along with diners. For the coming quarter, the company expects adjusted EBITDA to be $5 million. The company is also in talks for merger with Uber for an expected consideration of ~$6 billion. A potential merger of Uber and Grubhub would provide major motivation for both the companies in the food ordering and delivery sector. If the merger takes place, it will save more than $300 million by removing redundant functions, along with enhanced office administration. 
 
Valuation Methodology:P/BV Multiple Based Relative Valuation (Illustrative)
  
 
P/BV Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation: The stock of GRUB closed at $54.97 with a market capitalization of ~$5.1 billion. The stock made a 52-week low and high of $29.35 and $80.25, respectively, and is currently trading close to the average of its 52-week trading range. The stock has delivered a positive return of ~30.91% and 8.59% in the last one month and three months, respectively. Debt to equity in March’20 stood at 0.45x, higher than the industry median of 0.16x. The company stands to benefit from its efforts to enhance the delivery network and strengthen alliances with new and quality-focused restaurant partners. However, stiff competition might be a headwind, going forward. Considering the above factors, we have valued the stock using a P/BV multiple based illustrative relative valuation method and arrived at a target price with limited downside (in % terms). Hence, we have a watch stance on the stock at the closing price of $54.97, up 0.46% on 15 May 2020.
 
 
GRUB Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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