Shawcor Ltd. (TSX:SCL) is a Canada-based global energy services company. It serves various sectors of the Infrastructure, Energy and Transportation markets through three segments: Pipeline and Pipe Services, Composite Systems, and the Automotive and Industrial segments of the energy industry.

Investment Rationale

Turned Profitable in Second Quarter of FY21: The company turned profitable both on operating front and bottom-line front in the second quarter of FY21. Reported operating income of CAD 10.43 million vs operating loss of CAD 36.16 million in same quarter of the previous financial year and reported Net profit of CAD 2.59 million vs net loss of CAD 36.89 million reported in the same quarter of the previous financial year.

Deleveraged Balance Sheet: On the back of margin expansion and improved cash flows from the operations. The company has deleveraged its balance sheet, with Debt/Equity ratio lowered from 0.73x as of March 31, 2021, to 0.62x as of June 30, 2021, implies lowering balance sheet risk.

Source: REFINITIV, Analysis by Kalkine Group

Sequential Quarter Margin Expansion: The company has reported solid margin expansion in Q2FY21, despite heightened inflationary pressure, the company is able is to protect its margin, reflects strength of business model to pass on the incremental cost to the customers.

Source: REFINITIV, Analysis by Kalkine Group

Higher Institutional Investor’s Presence: Institutional holding in the company stood at ~51% , which is significantly higher given the penny cap market categorization of the company. Also, higher institutional holding significantly reduces the chances of accounting fraud especially in penny cap or micro-cap companies and extend confidence to the retail investors.

Strong Relative Price Strength: The company has significantly outperformed the benchmark index over the past one year. Relative outperformance of SCL shares against benchmark TSX Venture index stood at 74.22%, implies strong relative strength in the stock.

Relative Price Performance. Source: REFINITIV, Analysis by Kalkine Group

Technical Highlights

• On weekly price chart, SCL shares are hovering above 50-day and 100-day SMAs, acting as crucial support level in the stock.
• On weekly price chart, the leading momentum indicator MACD oscillator hovering above 9-day SMA signal line, implies that bulls are trying to move prices up.

Risk Associated

The company’s operation are exposed to variety of risks ranging from increase in input costs on the back of inflationary pressure, legal and litigation risks, supply chain risks on the back of resurgence in COVID-19 cases, forex risks as majority of revenue comes from U.S market, demand risk, interest rate risks and liquidity risk as well.

Financial Highlights: Q2FY21

Source: Company Filing

• Revenue up 15% on a YoY: During the quarter under consideration, the company’s consolidated revenue stood at CAD 305.9 million reflecting an increase of 15%, from CAD 266.1 million during the second quarter of 2020, mainly driven by 31% surge in sale of products and 2% increase in rendering of services segment revenue.
• Bolstered Gross Profit: In Q2FY21, the company’s reported gross profit bolstered by ~33% to CAD 89.87 million compared to CAD 67.7 million reported in the same quarter of the previous financial year, mainly driven by solid topline growth.

• Solid Operating Performance: The company reported operating profit of CAD 10.43 million in the second quarter under consideration vs losses operating loss of CAD 36.16 million reported in the same quarter of the previous financial year, on back of significant reduction in restructuring costs and expansion in gross margin.
  

• Reported Positive Earnings: Net Income in Q2FY21 stood at CAD 2.59 million vs net loss of CAD 36.89 million reported in the Q2FY20. EPS for Q2FY21 stood at 0.04 vs loss per share of 0.52 in Q2FY20.
  

• Liquidity Position: As of June 30, 2021, the Company had cash and cash equivalents of CAD 140.0 million vs December 31, 2020 – CAD 214.5 million and had unutilized lines of credit available to use of CAD 299.2 million as of June 30, 2021   CAD 246.3 million available as of December 31, 2021.

Top-10 Shareholders

Top-10 shareholders, together holds approximately 47.42% stake in the company, with Turtle Creek Asset Management Inc. and Burgundy Asset Management Ltd. are the major holders holding approximately 17.84% and 9.53% respectively. Institutional ownership in the company stood at ~50.5%.

Source: REFINITIV

Valuation Methodology (Illustrative): Price to Sales-Based Valuation

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation

The company reported solid performance in Q2FY21, with revenue up 15% on YoY, reported margin expansion, turned profitable on operating as well as on bottom line. Moreover, sequential quarter gross margin expansion reflects the strength of business model to pass the incremental cost pressure to the client. Further, the company has deleveraged its balance sheet consistently, reducing balance sheet risks. Also, higher institutional ownership in the stock extend confidence to the retail investors and reduces chances of financial shenanigans.

However, investment in SCL are exposed to variety of risk highlighted in the risk section.

Therefore, based on the above rationale, risk associated, and valuation done, we recommend a “Speculative Buy” rating at the closing price of CAD 5.28 (October 26, 2021).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. 

Technical Analysis Summary:

1-Year Price Chart (October 26, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on October 27, 2021, price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.