Ag Growth International Inc. (TSX: AFN) manufactures portable and stationary grain handling, storage and conditioning equipment, including augers, belt conveyors, grain storage bins, grain handling accessories, grain aeration equipment and grain drying systems.

Key Updates:

• Acquisition update: The company recently acquired Eastern Fabricators, which operates as an engineering, design, fabrication, and installation of high-quality stainless-steel equipment and systems for food processors. On a TTM basis, Eastern Fabricators generated a revenue of CAD 26 million and an adjusted EBITDA of CAD 26 million. This is expected to drive strong revenue synergies, as Eastern has strong customer relationships through its superior project execution.

• Growing demand for Farm equipment: The demand for the Farm equipment stood strong in Q3FY21, as customers focuses on purchasing critical equipment in order to increase their crop volumes. At the end of Q3FY21, the company’s farm equipment backlog grew 202% on y-o-y basis, with considerable strength across all geographies including the U.S. as well as Brazil.

• Strong momentum from the Food platform segment: During Q3FY21, the group reported 153% y-o-y growth in Food platform backlogs. The growth was aided by strong demand from the food and beverage end markets, higher repeat business from existing customers, coupled with onboarding of new customers during the period. The group expects the momentum to continue in Q4FY21 and Q1FY22 as well, which is encouraging.

Risks

The operations of the company are correlated to the current economic scenario and are related to several macro and micro risks, such as fluctuations in the commodity prices, timing and conditions of harvest, volatility in currency etc.

 Q3 FY21 Financial Highlights: (CAD in thousands)

 Q3FY21 Income Statement Highlights (Source: Company Report) 

• AFN announced its quarterly result, wherein the company posted sales of CAD 313.6 million, as compared to CAD 281.4 million in Q3FY20.
• Gross profit stood higher at CAD 85.5 million, as compared to CAD 46.8 million in pcp. The surge was primarily driven higher revenue and lower cost of goods sold (CAD 228.1 million v/s CAD 234.5 million in pcp).
• The company reported a rise in total expenses (CAD 88.7 million v/s CAD 65.5 million in pcp) due to higher selling, general and administrative costs.
• The company reported a lower net loss of CAD 0.07 million, as compared to a net loss of CAD 12.2 million in pcp.

 Valuation Methodology (Illustrative): Price to Earnings-based

 Analysis by Kalkine Group

Stock Recommendation:

In 9MFY21, the company showcased solid operational performance which resulted to higher Adjusted EBITDA of CAD 131.6 million, higher than CAD 121.513 million in pcp. We have valued the stock using the P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like CES Energy Solutions Corp, Enerflex Ltd etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 31.25 on January 28, 2022, at 9.56 A.M Toronto time.

One-Year Technical Price Chart (as on January 28, 2022). Source: REFINITIV, Analysis by Kalkine Group

Canacol Energy Ltd

Canacol Energy Ltd. (TSX: CNE) is a natural gas exploration and production company which operates across the Colombia region.  

Key Updates:

• Attractive dividend yield: The stock of CNE carries an annualized dividend yield of ~6.603%, which looks attractive considering the ongoing interest rate scenario. Moreover, the company reported higher dividend payment of USD 22.2 million in 9MFY21, as compared to USD 13.5 million in pcp. This is impressive as most of the companies are lowering their dividend distribution in order to retain liquidity.
  

• Robust margins: At the end of Q3FY21, the company reported EBITDA margin and operating margin of 62.2% and 40.7%, respectively, as compared to the industry median of 47% and 26.5%, respectively. Pretax margin stood higher at 30.3% in Q3FY21, as compared to the industry median of 14.4%. This indicates higher operational efficiencies, which is encouraging.
  

• Higher liquidity: The company reported its quick ratio and current ratio of 1.13x and 1.14x, respectively in Q3FY21, as compared to the industry median of 0.84x and 0.96x, respectively. This indicates improved liquidity profile and prudent working capital management.

• Recent updates: For December 2021, the company reported its natural gas sales of 183 million standard cubic feet per day. The company completed its Clarinete 6 development well which reached a total depth of 7,478 feet measured depth. The well encountered 174 feet true vertical depth of net gas pay with an average porosity of 22% within the primary Cienaga de Oro sandstone reservoir target. 

Risks: The company’s operations are correlated with the international crude oil prices, while a voltility in the commodity prices would dampen the company’s overall realisation and cash flow.

Q3FY21 Financial Highlights:

Q3FY21 Income Statement Highlights (Source: Company Report)

• CNE declared its third-quarter result, wherein the group reported total revenue of USD 9 million, lowered from USD 64.4 million in the previous corresponding period (pcp). Realized contractual natural gas and liquefied natural gas sales volumes increased 17% on y-o-y to 190.6 MMscfpd.
• Total expenses stood higher at USD 48.7 million from USD 38.8 million in pcp. The quarter was marked by higher Transportation expenses (USD 9.1 million v/s USD 7.0 million in pcp), inclusion of Natural gas trading purchases cost amounting USD 6.4 million.
• Income before income taxes was recorded at USD 24.8 million, stood higher from USD 17.4 million in Q3FY20. The increase was primarily due to higher revenue partially offset by higher net finance expense.
• Net income stood higher at USD 8.7 million, as compared to USD 2.6 million in Q3FY20.
  

Valuation Methodology (Illustrative): Price to Cash Flow based methodology.

Analysis by Kalkine Group 

Stock Recommendation:

Adjusted funds from operations increased 14% on y-o-y basis to USD 38.2 million in Q3FY21, compared to USD 33.4 million in pcp. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Advantage Energy Ltd, Parex Resources Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of CNE at the closing price of CAD 3.15 on January 28, 2022 at 10.22 AM Toronto Time.

One-Year Technical Price Chart (as on January 28, 2022). Analysis by Kalkine Group 

Technical Analysis Summary:

Computer Modelling Group Ltd

Computer Modelling Group Ltd (TSX: CMG) is a Canada-based provider of reservoir simulation software for the oil and gas industry. Its capabilities include integrated analysis and optimization, black oil and unconventional simulation, reservoir and production system modelling, post-processor visualization, compositional simulation, thermal processes simulation, and fluid property characterization.

Key Updates:

• Robust Margins: The company reported a its EBITDA margin and operating margin of 47% and 55.2%, respectively, in Q2FY22, as compared to the industry median of 11.5% and 2%, respectively. Additionally net margin was recorded at 37.9% in Q2FY22, as compared to the negative industry median of 1.7%. This shows that the company has higher operational efficiencies as compared to the industry median, which is a key positive.

• Prudent working capital management: The company reported its current ratio of 2.17x in Q2FY22, higher than the industry median 2.01x. The above indicates that the company has ample current assets to meet its short-term liabilities. Moreover, the company has lower cash cycle days of 47.8 days, significantly lower than the industry median of 82.2 days, which shows that the group is efficient to convert its investments in inventory and other resources into cash flows.
• Future ready business: The company’s business seems to be future ready, as it has added new software and consulting contracts within the energy transition and CO2 segments in Q2FY22. As per the recent macro trend, companies are focus on energy transition from conventional oil and gas sector to hydrogen, geothermal and other processes/mechanisms etc. Notably, the group’s existing software has the technical capabilities to support energy transition-related model, which is a key positive.

Risks: The company reports its major revenue from the Annuity/maintenance licenses fees, which are primarily depends on the oil and gas industry. Hence, due to lower capital expenditure by the oil and gas manufacturers, the company reported a slide in software license revenue across the geographic regions. Continuation of the above trend is likely to dampen the company’s overall operations.  

Financial Highlights Q2FY22

 Q2FY22 Income Statement Highlights (Source: Company Report)

 Q2FY22 Financial Highlights:

• CMG announced its second quarter result, wherein the company posted its top line at CAD 15.9 million, lower from CAD 17.8 million in the previous corresponding period (pcp). The decline was primarily due to a decline in both software license revenue and Professional services.
• The company witnessed a surge in its operating expenses (CAD 10.5 million v/s CAD 7.9 million in pcp), due to higher research & development costs and an increase in both general & administrative costs and Sales, marketing & professional service.
• Net and total comprehensive income were reported at CAD 4.1 million, lower from CAD 6.7 million in pcp.

Valuation Methodology (Illustrative): Price to Earnings based

 Analysis by Kalkine Group

Stock Recommendation:

The stock of CMG carries an annualized dividend yield of ~4.376%, which looks impressive considering the ongoing interest rate scenario. The stock closed above its 20-days and 50-days simple moving average, which indicates a bullish pattern. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Software & IT services) mean on NTM basis. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 4.55 on January 28, 2022, at 10.20 A.M Toronto Time.

One-Year Technical Price Chart (as on January 28, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary:

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV. 

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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.