Tucows Inc. (TSX: TC) operates in technology market primarily in the United States and to a lesser extent in Canada and Germany. Its services touch upon two segments in the technology sector; Domain Services and Network Access Services. 

Why should Investors Exit?

• Weak liquidity: The company is battling with its working capital management and reported its quick and current ratio of 0.84x and 0.85x respectively, lower than the industry median of 1.52x and 1.59x, respectively. This indicates that the company is unable to fund its short-term liabilities with its current assets.
  

• Highly leveraged balance sheet: At the end of Q3FY21, the group reported its D/E ratio of 1.32x, significantly higher than the industry median of 0.51. A higher debt level tends to reduce the overall financial flexibility of the company. Moreover, the company reported its long-term debt to total capital of 57%, versus the industry median of 26.3%, which also suggests a higher risk level. 
  

• Poor debt protection metrics: Net debt to EBITDA significantly higher at 27.13x, as compared to the industry median of 4.57x, which implies poor debt protection ability of the firm. This remains a key concern for the company.
  

• Lower profitability margins: During Q3FY21, the company witnessed higher input costs, primarily due to higher sales & marketing expenses, increase in cost of goods sold, higher general & administrative expense etc. This has impacted the company’s profitability margins, and continuation of the above trend remains a major concern. Notably, EBITDA margin and net margin for Q3FY21 was recorded at 6.7% and 1.8%, respectively, as compared to the industry median of 19.5% and 6.9%, respectively.
  

Valuation Methodology (Illustrative): Price to Earnings based

Analysis By Kaline Group

Stock Recommendation:

The group reported a depressing performance from its Fiber Internet Services. Despite a higher income from the Fiber Internet Services segment (USD 6,672 million in Q3FY21 v/s USD 4,657 million in pcp), the group failed to retain the momentum and posted higher adjusted EBITDA of loss of USD 4,358 million in Q3FY21, v/s an adjusted EBITDA loss of USD 1.052 million in pcp. We have valued the stock using the Price to Earnings-based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like Verisign Inc, Crexendo Inc etc. Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock at the last traded price of CAD 100.11 on January 13, 2022.

One-Year Technical Price Chart (as on January 13, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

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