Titanium Transportation Group Inc (TSXV: TTR) is assets-based transportation and logistics firm that provides services like truckload, dedicated, cross-border trucking services, freight logistics, warehousing, and distribution. The Company is organized into two segments, namely, the Truck Transportation segment and the Logistics segment.

Investment Rationale

• Robust Q2 2021 results: The Company delivered a fourth consecutive quarter of record revenue, an increase of 165.6% to CAD 100.8 million, mainly driven by significant growth in both the Truck Transportation and Logistics segment. It surpassed the CAD 100 million milestone for the first time in the Company's history. Even an increase of 141.0% was witnessed in an adjusted EBITDA to CAD 7.5 million, while the adjusted EBITDA margin stood at 8.1%.

• Acquired International Truckload Services (ITS) Inc: Titanium recently purchased International Truckload Services (ITS) Inc., which gave the Company 330 power units, 1,600 trailers, and 470 staff and drivers. The ITS Group, which contributed CAD 15.9 million to the Company's transportation revenue, is being successfully integrated. Furthermore, the firm anticipates an annual revenue contribution of CAD 80 million from the acquisition, which is significant.

• Healthy guidance for 2021: As economic conditions improved, in part reflecting the loosening of some of the restrictions relating to the ongoing COVID-19 pandemic, Titanium's strategic investments in growth opportunities and focused execution helped the management in increasing its FY2021 annual guidance. They expect to clock the revenue of approximately CAD 350 million and an EBITDA of CAD 33 million.

• Expanding footprint in the US: Recently, the Company opened its newest Freight Brokerage office in Denver, Colorado. This marks the Company's fourth freight brokerage office in a major U.S. transportation and logistics geographic hub within the last 27 months. The group is expanding its technology-based logistics solutions and services to address the needs of existing and potential customers in the western United States. The Company is focused on this region as it is an attractive market opportunity given its high population growth, strengthening industrial market where it is home to nearly 6,000 manufacturers across various business sectors contributing approximately USD 18 billion in annual trade.

• Diversified sources of revenue: The firm is the most powerful operator in transportation and logistics services in North America, with income coming from a variety of industries. This is important since the Company's revenue is not biased toward a single source. The manufactured goods sector, food and beverage industry, and retail industry account for a large amount of revenue (more than 66%).

Source: Company

• Improving outlook: While operating circumstances are improving, growth in different markets is still unequal. The changing reaction to the COVID-19 pandemic across diverse locations is expected to have a significant influence on the rate of improvement. A number of marketplaces in the United States have recovered to, or even beyond, pre-pandemic levels of activity. While activity levels in major Canadian marketplaces are increasing, it is still low relative to pre-pandemic levels. A better scenario is a huge plus for the firm since it may boost volumes and cash flows.
  

• Solid balance sheet: The firm has a strong balance sheet, allowing it to continue to develop organically and inorganically. In Q2 2021, the company maintained its excellent capital management approach, which enabled it to enhance the debt-to-equity ratio. The net debt to equity ratio fell from 1.01 to 0.96 in the second quarter. The company's operational cash flows seem to be sufficient to finance daily operations and satisfy regular debt repayment commitments.

• Decent yield from penny stock: The dividend pay-out practice translates into an essential factor for regular income-seeking investors with a long-term horizon. Recently, the company declared a quarterly cash distribution of CAD 0.02 per common share, payable on September 15, 2021. Moreover, at the last closing price, the stock was offering a dividend yield of 2.5%, which looks decent considering the current macros and interest rates.
  

• Registered a breakout on the daily price chart: On the daily chart, TTR stock price broke out the downward sloping trend line resistance at CAD 3.16 level on August 11, 2021. Since the breakout, prices are sustaining above the downward sloping trend line, which indicates bulls are in action. Prices have tested the breakout level recently and bounced from that level. Moreover, the prices are trading above the trend-following indicator 21-period SMA, indicating a positive momentum. The leading indicator RSI (14-Period) is trading at ~53.01 levels and showing strength, indicating bullish momentum in the stock.

            Source: REFINITIV, Analysis by Kalkine Group

• Risks associated with investment: The Company's business is subject to several risk factors, including duration and impact of the COVID-19 pandemic on the global economy, as it is not possible to reliably estimate the length and severity of COVID-19 related impacts on the financial results and operations of the company. Further, the company is exposed to forex risks as a majority of the group's revenue comes from the abroad market, especially US Dollars.
  

Financial overview of Q2 2021 (in Canadian dollars)

Source: Company

• In Q2 2021, the company reported revenue increased 165.6% to CAD 100.8 million, against CAD 37.9 million in the previous corresponding period. The increase in revenue reflected a combination of rapid organic US freight brokerage growth and contribution from the ITS acquisition.
• Truck Transportation segment revenue for Q2 2021 was of CAD 44.8 million, representing an 83.8% increase year over year, while Logistics segment revenue increased by 294.2% to CAD 57.7 million compared to CAD 14.6 million in the previous corresponding period.
• On the back of higher revenue, the total expenses increased to CAD 93.0 million in Q2 2021, against CAD 32.6 million in pcp. Total expenses as a % of revenue increased to 92.4% from 86%.
• Operating income in the reported period for the company increased to CAD 7.7 million against CAD 5.3 million in Q2 2020.
• Finance cost increased to CAD 0.98 million from CAD 0.70 million in pcp.
• The company posted slightly higher income before income tax at CAD 1.3 million against CAD 1.2 million, primarily due to higher revenues and operating income.
• Primarily due to above discussed rationale, the company’s net income for the reported period stood at CAD 0.93 million against CAD 0.87 million in the previous corresponding period.
  

Top Shareholders

The top shareholders have been highlighted in the table, which forms around 36.16% of the total shareholding. Trunkeast Investments Canada, Ltd. and Daniel Theodore hold the company's maximum interests at 28.19% and 7.29%, respectively. The institutional ownership in the company stood at 0.69%, and ownership of the strategic entities stood at 35.47%.

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

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

Despite the fact that the COVID-19 pandemic has created one of the most difficult working situations in history, the firm has produced a strong financial and operational performance. It saw a robust rise in sales to CAD 100.8 million in the quarter, owing to substantial growth in both the Truck Transportation and Logistics segments. For the first time in the company's existence, it has surpassed the CAD 100 million mark. Recently, Titanium acquired International Truckload Services (ITS) Inc., which contributed CAD 15.9 million to its trucking revenue. Furthermore, the company expects a contribution of CAD 80 million in annual revenue to the company, which is appreciable. The company also expects to deliver operating synergies and realize improved profitability in the trucking segment through the second half of the year as it leverages its scaled fleet and increased capacity.

While operating conditions are also improving as several markets have returned to, or exceeded, pre-pandemic levels of activity in the U.S and key Canadian markets are also improving. On the back of these changing scenarios, the management increased its FY2021 annual guidance to clock the revenue of approximately CAD 350 million and an EBITDA of CAD 33 million. Additionally, the company is also increasing its footprint in the US and wants to tap a huge opportunity, which is a key positive. Furthermore, the company hold a strong balance sheet and improved its net debt to equity ratio to 0.96x in Q2 2021 from 1.01x in Q1 2021.

Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 3.20 on August 24, 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

One-Year Technical Price Chart (as on August 24, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

* Recommendation is valid on August 25, 2021 price as well.

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