Spark Power Group Inc (TSX: SPG) provides electrical power services and solutions to areas in North American industrial, commercial, institutional, renewable, and agricultural customers. The Company’s major revenue is fetched from the technical services segment which includes the New Electric, Spark High Voltage, Orbis, Lizco and 3-Phase CGUs.

Why Should Investors Book Profit?

• Diminishing Margins on Sequential Basis: The company is underperforming sequentially based on EBITDA Margins, Operating Margins and Net margins. The company has posted Negative EBITDA Margins of 1.7% as of September 2021 as compared to Industry Median of 72.2%. The Company reported negative operating margins of 4.6% versus Industry Median of 22.2%. Also, Net Margins of the company is sequentially decreasing and comes to -4.1% in September 2021.
  

• Highly Leverage: The company is indebted to bank of CAD 26.52 million as on September 2021 as compared to CAD 20.394 million in September 2020. This may create liquidity risk for the company. Further the Debt Equity ratio of the company is 2.94x which is on higher side as compared to the industry median of 2.67x.
  

• High Accounts Receivable Days: The company has average receivables days of 118.7 which is higher as compared to the Industry Median of 79.5 days. Hence it will raise the liquidity risk of the company and will slow the recovery process of cash flow.
  

• Decreasing Free Cash Flow: The Company has posted free cash flow of CAD 0.91 million in September 2021 vs CAD 3.56 million in June 2021, which is sharply decreasing on quarterly basis. This has increased the cash cycle to 130.6 Days in September 2021 which is adverse in comparison to Industry Median of 82.1 days (Negative).
  

Stock recommendation

The Company reported a subdued quarter, also, the margins were drastically below with Industry Median. After the latest quarter results and increase in indebtedness to bank it can be assumed that company is undergoing with credit risk, liquidity risk and financial risk which will become hindrance for financial recovery in future. Also, company has not sufficient free cash flows to repay its increasing debt. Further, the comeback of the delta variant and omicron is making abrupt situation for the company and for the complete sector and would adversely impact the financials of the business.

Hence based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 1.20 as on January 10, 2022.

One-Year Price Chart (as on January 10, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

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