Enerflex Ltd.

Enerflex Ltd. (TSX: EFX) engineers, designs, develops and delivers aftermarket support for equipment, systems and turnkey services, which are primarily used for natural gas from the wellhead to the pipeline. The Group’s wide in-house resources offer the capability to engineer, design, manufacture, construct, commission, and service hydrocarbon handling systems.

The Board of directors declared a quarterly dividend of CAD 0.02 per share, payable on January 7, 2021.

Q3FY20 Financial Highlights:

• EFX announced its quarterly results, wherein the company posted a significant fall in top-line and profitability due to considerably lower capital investments by the oil-manufacturing companies. Revenue stood at CAD 265 million, as compared to CAD 544.3 million in the previous corresponding period (pcp).
• Gross margin and EBITDA stood at CAD 63.7 million and CAD 42.8 million respectively, as compared to CAD 132.6 million and CAD 109.1 million in pcp.
• During the quarter, the Company invested CAD 17.6 million in rental assets across USA and Rest of World segments. Moreover, the Management informed that three of its four previously announced Build-Own-Operate-Maintain projects were successfully commissioned in Argentina and Brazil.
• Net earnings plunged drastically to CAD 10.7 million, as compared to CAD 63.1 million, a year ago.

Q3FY20 Financial Highlights (Source: Company Reports)

Risks Associated to the Investment:

The company caters to oil-producing companies, and due to the drastic fall in the crude oil prices, the companies have curtailed their capital investments. Continuation of such a trend would hamper the group’s performance.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Due to the on-going over-supply scenario within the crude oil industry, the company witnessed a steep decline in its order book. However, in the recent past, the sector witnessed improvement in natural gas benchmark pricing, while the company has yet to witness a meaningful improvement in its bookings. The company’s backlog, at the end of Q3FY20, stood at CAD 186.3 million, significantly lower than CAD 701.6 million, a year ago. The current environment is not favourable for the group and has resulted in a steep decline in Q3FY20 bookings, which stood at CAD 23.4 million, as compared to CAD 125.5 million in pcp. Recurring revenue also declines by 6.1% on y-o-y basis and is a key concern for the company. The Management guided that the outlook for Engineered Systems remains uncertain in the foreseeable future and revenues from this segment are expected to remain gloomy through the remainder of FY20 and for the first half of FY21. Considering the aforesaid facts, we prefer to remain on the sidelines. We valued the stock using the Price to CF based relative valuation approach and arrived at a target price, which suggests a high single-digit downside potential (in % terms). For the said purpose, we have considered industry (Oil & Gas Equipment Services) median on Next twelve months (NTM) basis. Hence, considering the aforesaid facts, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 5.44 on November 10, 2020.

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

Aurora Cannabis

Aurora Cannabis (TSX: ACB) is a Canada-based company which serves both the medical and consumer markets. The company has headquartered in Edmonton, Alberta, and the group is a pioneer in global cannabis dedicated to helping people improve their lives.

Key Highlights

• The cannabis market within the US is expected to grow from USD 5.1 Billion to USD 12.3 Billion in FY22, and we believe the company is well positioned to address the upcoming opportunity.

Market Size and Corporate strategy (Source: Company Presentation)

• ACB is characterized by low-cost cultivation, product innovation and has economies of scale, which leads to a production run rate of 150,000 kg/year, which is impressive.

Q1FY21 Financial Highlights:

• In Q1FY21, the company posted revenue of CAD 67.812 million, as compared to CAD 73.714 million in the previous corresponding period (pcp). The decline was primarily attributable to higher excise taxes (CAD 14.854 million versus CAD 9.912 million in Q1FY20).
• The average net selling price of dried cannabis stood mildly higher at CAD 3.72, compared to CAD 3.60 in Q4FY20. During the quarter, the company sold 16,139 kg of dried cannabis, as compared to CAD 16.748 million in pcp.
• Gross profit before fair value adjustments stood CAD 24.518 million, lower than CAD 39.571 million in pcp, due to lower revenue and an increase in the cost of sales.
• The company reported a loss from operations at CAD 42.326 million, against CAD 77.788 million in pcp.
• The corporation posted a net loss of CAD 109.526 million, as compared to a profit of CAD 7.437 million in pcp, due to exceptional gains of CAD 127.656 million in Q1FY20.
• The group ended the quarter with cash and cash equivalent of CAD 133.678 million, while total assets stood at CAD 2,757.272 million.

Q1FY21 Financial Snapshot (Source: Company Reports)

Risks: The company is exposed to a range of risks, including cannabis prices, legal restrictions, and lower demand offtake.

Stock Recommendation: The company has patents rights over more than 100 products which include Medical & Recreational items, Plant variety protection, Genetics & Biosynthesis etc. Furthermore, the company is focusing on improving patient and consumer experiences through new innovative product formats. Shares of ACB recorded steep prices surge over the past five trading sessions and leapt up more than 134% in the same period. Also, in a month over period, its shares are posing a price return of 122.3% and gigantically outperforming its benchmarks. However, following Joe Biden victory, Cannabis stocks have witnessed sharp rally on the stock exchange as the market is expecting legalization of Cannabis distribution across the United States. However, the leading momentum indicator, 14-day and 9-day RSI is hovering in a strong overbought zone and oscillating above 80, which indicates a near term price correction in the stock.

Further, its shares have corrected approximately 26% during November 10, trading session; however, despite this correction, its shares are still trading in overbought territory. On the valuation front, the stock is trading at a forward EV to Sales multiple of 6.1 against the industry (Pharmaceuticals) median of 3.4x. Therefore, based on the above rationale and technical indicator, we have given a ‘Watch’ stance on the stock at the closing price of CAD 10.78 on November 10, 2020.

1-Year Price Chart (as on November 10, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

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.