Aurinia Pharmaceuticals Inc. (TSX: AUP) is a late-stage clinical biopharmaceutical company focusing on developing and commercializing therapies to treat targeted patient populations impacted by severe diseases.

Key highlights 

• Leadership succession: The Company appointed Mr Robertson as Executive Vice President, General Counsel, Corporate Secretary & Chief Compliance Officer, following the departure of Dr. Erik Eglite, who served as General Counsel since 2017.

• Collaboration and Licensing Agreement with Otsuka Pharmaceutical: The company has entered into a collaboration and license agreement with Otsuka Pharmaceutical Co., Ltd. for the development and commercialization of oral voclosporin for the treatment of Lupus Nephritis (LN) in the European Union (EU), Japan, as well as the United Kingdom, Russia, Switzerland, Norway, Belarus, Iceland, Liechtenstein and Ukraine. As part of the agreement, the company will receive an upfront cash payment of USD 50 million along with tiered royalties ranging from 10 to 20% on net sales upon commercialization.

• Exclusive Agreement with Lonza for Dedicated Voclosporin Manufacturing Capacity: The company recently announced that it has expanded the exclusive manufacturing relationship through a collaborative agreement to build a dedicated manufacturing capacity within Lonza’s existing small molecule API facility in Visp, Switzerland. This State-of-the-Art Monoplant would provide cost and production efficiency and Secure Active Pharmaceutical Ingredient (API) supply for future commercial demand.

• New Drug Application (NDA) for voclosporin granted Priority Review:The FDA has granted Priority Review for the NDA, which provides an expedited six-month review, and has assigned a PDUFA target action date of January 22, 2021. There are currently no FDA-approved treatments for LN. If the company gets FDA approval for this treatment, it will be a huge milestone. 

• Ample liquidity: As of September 30, 2020, the company had cash & cash equivalents of USD 421 million, increased by USD 115 million, compared to USD 306 million on December 31, 2019. The management believes that it has sufficient financial resources to fund its current plans and fund its supporting corporate and working capital needs through the end of 2022. 

Financial overview of Q3 2020 (amounts in thousands of U.S. dollars)

Source: Company 

• In Q3 2020 the Company posted licensing revenue of USD 29,000 compared to USD 0.23 million in the previous corresponding year.
• R&D expenses decreased to USD 4.8 million in Q3 2020, compared to USD 17.8 million in Q3 2019. The decrease is due to a reduction in clinical trials activities.
• The company increased its corporate, administration and business development expenses to USD 31.1 million in Q3 2020, compared to USD 6.1 million in Q3 2019. The increase reflects the investment incurred to build out the organization to support the launch of voclosporin as a treatment for LN planned for early 2021.
• On the back of lower revenues coupled with higher operating expenses, the company posted a net loss of USD 34 million in the reported quarter, compared to a loss of USD 19 million in the previous corresponding period. 

Risks associated with investment

The company's income depends upon the results of the clinical trial and the subsequent approval of trials. There is a chance of cancellation of the drug approval, which would hinder the business prospect. 

Stock recommendation

At present, there are no FDA-approved treatments for LN. If the company gets FDA approval for this treatment, it will be a huge milestone for them, and the management believes that approval by the FDA of voclosporin as a treatment for LN is reasonably assured. With this assurance, the Company had made a license agreement with Otsuka Pharmaceutical Co., Ltd. to develop and commercialize oral voclosporin to treat (LN) in the European Union, Japan well as the United Kingdom along with many other European nations. Therefore, based on the aforementioned facts, and risks involved, we recommend a “Speculative Buy” on the stock at the closing price of CAD 18.05 as on January 12, 2021.

Source: Refinitiv (Thomson Reuters)

Ag Growth International Inc

Ag Growth International Inc (TSX: AFN) is a leading provider of equipment solutions for agriculture bulk commodities including portable and stationary grain handling, storage and conditioning equipment, belt conveyors, grain storage bins, grain handling accessories, grain aeration equipment and grain drying systems. It has manufacturing facilities in Canada, the United States, Italy, Brazil, and the United Kingdom. Western Canada region generates most of the company's revenue.

Key highlights

On 2nd December 2020, the Company announced the retirement of Gary Anderson from its Board of Directors. Mr Anderson is a co-founder of Ag Growth International Inc.  

• Trade sales in the U.S. increased 12%:The group recognized maximum share of the revenue from the U.S in Q3 2020. Although all the geographies have shown an increase in revenue as compared to previous corresponding period, the U.S reflected the most remarkable change, since farm sales increased 23% due to a natural replenishment cycle that occurred in the first half of 2020 and continued into Q3.

Source: Company 

• Healthy Balance sheet:The Company is having a cash balance of CAD 75 million along with CAD 9.5 million under Cash held in trust. Further, the Credit Facility includes committed revolver facilities of CAD 225 million and USD 215 million with a maturity date of March 20, 2025. The Credit Facility consists of a separate one-year revolving facility of CAD 50 million to provide increased short-term flexibility during the COVID-19 crisis. 

• Dividend distribution: Recently, the company declared a cash dividend of CAD 0.15 per common share for the fourth quarter with an annualized cash dividend rate of CAD 0.60 per share. The dividend will be payable on 15th January 2021, to common shareholders with a record date of 31st December 2020.

Financial Overview of Q3 2020 (In thousands of Canadian dollars)

Source: Company 

• The Company posted an increase in revenue by 8.2% to CAD 281.4 million, compared to CAD 260.1 million in Q3 2019 because of high farm sales in all the geographies, partially offset by the commercial sales.
• The Company posted a gross profit of CAD 46.8 million in Q3 2020, compared to CAD 65.5 million in Q3 2029, on the back of increased COGS, due to equipment rework worth CAD 40 million.
• The Company posted a net loss of CAD 12.2 million in Q3 2020, compared to a net loss of CAD 2.8 million in the previous corresponding period, due to above stated reason regarding equipment rework. 

Risks associated with investment

The Company is exposed to many risk factors that alone or cumulatively can affect its operations and financial health. Some of the risks include fluctuations in agricultural and other commodity prices, crop planting, crop conditions and crop yields, weather patterns, the timing of harvest and conditions during harvest, volatility of production costs, interest and currency exchange rates, governmental regulation of the agriculture and manufacturing industries, etc.

Valuation Methodology (Illustrative): Price to Cash Flow

Note: All forecasted figures and peers have been taken from Thomson Reuters

The Company’s business stood resilient during the Covid-19 pandemic, and the farm segment remains robust and unaffected. Crop conditions and demand remains favourable in Canada and the U.S regions. Also, farm sales increased 23% in the U.S due to natural replenishment cycle that occurred in the first half of 2020 and continued into Q3. The Company maintains a strong balance sheet, having a cash balance of CAD 75 million and CAD 9.5 million under Cash held in trust, along with healthy credit revolving facilities. The group also generated a free cash flow of CAD 26 million in Q3 2020. All of these factors show the nutritional credibility of the Company. Therefore, based on the above rationale and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 32.88 on January 12, 2021. We have considered Superior Plus Corp, Savaria Corp etc. as the peer group.

1-Year Price Chart (as on January 12, 2021). Source: Refinitiv (Thomson Reuters)

Gamehost Inc.

Gamehost Inc. (TSX: GH) is operating in hospitality and gaming properties in Alberta, Canada. The company operate services like the Gaming segment which includes casinos offering slot, VLT, lottery and table games; Hotel segment includes hotels catering to mid-range clients and The Food and Beverage segment operations that are located within the casinos and hotels as a complement to other segments.

Key Updates:

• Business Expansion: The group is working on a 7,500 square foot expansion of gaming and non-gaming amenities at the Deerfoot Casino with expected completion in spring of 2021. Moreover, the group reported the receipt of development permit approval from the AGLC and the Regional Municipality of Wood Buffalo, which includes a 6,400 square foot expansion of Boomtown Casino. The above project would consist of full exterior facelift combined with an expansion and interior refresh for all non-gaming amenities. We believe, with the re-opening of the casinos, the company would likely to report higher traction, which would support the company’s upcoming performance.
• Strong margins: Despite the ongoing sectoral weakness, the group has reported impressive EBITDA margin (53.5% versus industry median 16.4%) and operating margin (40.6% versus industry median of 7.2%) in Q3FY20, which depicts improved operational efficiency. Moreover, during Q3FY20, the corporation reported a net margin of 30.7%, considerably higher than the industry median of 1.4%.

Q3FY20 Financial Highlights:

• GH reported its quarterly results, wherein the company posted operating revenues of CAD 10.1 million, as compared to CAD 16.9 million in the previous corresponding period (pcp). The decline was primarily attributable to the ongoing closure of casinos across the country.
• The company’s gross profit stood at CAD 3.5 million, significantly lower than CAD 6.9 million in Q3FY19 (pcp).
• Profit from operating activities stood at CAD 4.1 million, lower than CAD 5.9 million in the previous corresponding period (pcp). The decline was due to a lower gross profit, partially offset by lower administrative expenses (CAD 0.6 million versus CAD 0.7 million in pcp).
• Net profit stood at CAD 3.1 million, lower than CAD 4.1 million in pcp, partially supported by a lower income tax expense (CAD 3.1 million versus CAD 4.1 million in Q3FY19).
• The company reported its cash balance of CAD 15.7 million, while total assets were reported at CAD 172.8 million.

Q3FY20 Income Statement Highlights (Source: Company Reports) 

Valuation Methodology (Illustrative): EV to Sales

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

Risks: Continued government restrictions on casino closure would weigh on the group’s performance.

Stock Recommendation:

The stock of GH appreciated ~21% and ~28% in the last three months and nine months, respectively. At the last closing price, the stock of GH closed above the long-term support levels of 100-days, 150-days and 200-days SMAs, indicating a bullish price trend. The company took prudent measures, and temporarily suspended its dividend payment in order to support the overall liquidity. We have valued the stock using EV to sales-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered industry (hotels and entertainment services) average on Next twelve months (NTM) basis. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 6.03 on January 12, 2021.

1-Year Price Chart (as on January 12^th, 2021). Source: Refinitiv (Thomson Reuters)

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