GURU Organic Energy Corp

GURU Organic Energy Corp (TSX: GURU) is a wellness company, engaged in the business of manufacturing and marketing organic energy drinks. Geographically, it derives most of the revenue from Canada and has a presence in the United States.

Why Should Investors Book Profit?

• Lower margin profile v/s Industry: In Q3 2021, the company failed on maintaining its pace and witnessed lower performance under operating margin matrix, consisting of EBITDA margin, operating margin, and net margin, which exhibits the pressure on company.

• Failed to transform higher gross profit into net profit: Despite clocking higher revenue and elevated gross profit in Q3 2021, the company failed to convert this growth in net profit, as it booked net loss of CAD 2.0 million compared to net profit of CAD 1.2 million in pcp.
• Higher average collection period: The company is having a higher average Accounts Receivable day of 56.9 days, against the industry median of 36.1 days. A higher average collection period indicates that the organization collects payments slower. This may create a difficulty for the company to have enough cash on hand to meet their financial obligations.
  

• Higher Cash Cycle days: The company is holding higher Cash Cycle (Days) compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 281.2 days compared to an industry median of 17.7 days.
  

Stock recommendation

Despite higher revenue and gross profit in the reported period for Q3 2021, the company failed to achieve net profit, owing to higher selling, general, and administrative expenses (SG&A), which were CAD 7.2 million or 90% of revenue, compared to SG&A of CAD 2.7 million or 41% of revenue in the same period a year ago. Because the company is still growing, a sharp increase in SG&A expenses could have a significant impact on its financials, which could continue to drag on the company's financials in the future. Furthermore, the company's margin profile is on the lower side, with a longer average collection period and longer cash cycle days than the sector median, indicating a weak liquidity profile and a slower rate of payment collection. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 16.865 on November 16, 2021.

One-Year Technical Price Chart (as on November 16, 2021). Analysis by Kalkine Group 

Sangoma Technologies Corp.

Sangoma Technologies Corp. (TSX: STC) is a provider of hardware and software components which allows Internet protocol communications systems for both telecom and datacom applications.

Key Highlights:

• Share consolidation update: On November 03, 2021, the company implemented reverse stock split option. The share and options counts reflect the 7:1 share consolidation that came into effect on November 2, 2021, wherein every Equity Shareholder will get one equity share against every seven Equity Shares. After the above consolidation, the stock of STC closed at CAD 26.46 per share on November 03, 2021.

• Lower margins: In Q1FY22, the company reported its gross margin of 15.5%, as compared to the industry median of 15.9%. Moreover, the group also reported a negative operating margin and a net margin of 3.2% and 4.4%, respectively, as compared to the positive industry median of 9.8% and 6.9%, respectively. The above indicates weak operational efficiencies and remains a key concern.

• Weak liquidity profile: The company is struggling with its working capital and posted its quick ratio and a current ratio of 0.74x and 0.98x, respectively in Q1FY22, significantly lower than the industry median of 1.44x and 1.82x, respectively.

• Surge in input costs: During Q1FY22, the company reported significantly higher input costs and posted total expenses of USD 38.706 million, as compared to USD 14.767 million in pcp. The increase was primarily due to higher sales & marketing expense (USD 13.087 million v/s USD 3.825 million in pcp), higher research & development expense (USD 8.359 million v/s USD 4.58 million), and a higher general & administrative expense (USD 17.266 million vs USD 6.371 million in pcp). Continuation of the above trend is likely to dampen the company’s profitability and margins.

Valuation Methodology (Illustrative): EV to Sales based

Stock Recommendation:

Despite the growth in the topline (USD 52.47 million v/s USD 26.22 million in pcp), the company reported a net loss of USD 2.261 million v/s a net profit of USD 1.615 million in pcp. The company is struggling to maintain its input costs, which remains a key concern for the company. We have valued the stock using the EV to Sales-based relative valuation approach and arrived at a target price offering double-digit downside potential (in % terms). We have considered peers like Blackline Safety Corp, Genasys Inc etc. Hence considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock at the last traded price of CAD 26.75 on November 16, 2021.

One-Year Technical Price Chart (as on November 16, 2021). Analysis by Kalkine Group

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

Disclaimer

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