Facedrive Inc.

Facedrive Inc. (TSXV: FD), formerly High Mountain Capital Corp, is a Canada-based ridesharing company. The Company provides a ridesharing platform that provides transportation solutions for riders and drivers.

Investment Rationale

• Strong Bullish Trend: Shares of FD are hovering in a bullish price zone, with its shares hovering well above the crucial short-term as well as long-term support levels of 50-day and 200-day moving averages. Moreover, Price/200-day SMA ratio of FD stood at 1.38x, which implies that FD shares are trading approximately 38% above the crucial long-term support level. Further, short-term as well as long-term moving averages are moving higher, which is another bullish indicator.

• Solid Relative Strength: In a year-over period, shares of FD soared approximately 567% and strongly outperformed the benchmark index by 553% at the same time. The stock is up ~ 541% on YTD basis outperforming the index by a massive 530%. The stock gained 11% in a month over period and outperforming the benchmark index by ~36% in the same period. The above performance depicts a strong relative strength in the FD shares. Further, the leading momentum indicator, 14-day and 9-day Relative Strength Index (RSI) hovering in a neutral zone, headroom for further price surge.
• Solid Improvement in Liquidity Position: In the September quarter of 2020, the company’s liquidity position has been improved significantly, with current ratio jumped to 4.01x from 2.90x reported at the end of June quarter. And quick ratio which considers more liquid current assets other than inventory improved to 3.97x from 2.88x reported in the June quarter. A solid liquidity position implies that the company would manage its current obligation easily. The company has manageable debt outstanding as well, hence negligible balance sheet risk.

Financial Highlights

Source: Company Filing

• Revenue for the three months ended to September 2020 jumped ~ 36% to CAD 0.266 million against 0.196 million reported in the same period of the corresponding previous financial year.
• Operating expenses widened by approximately 211% to CAD 3.85 million from CAD 1.15 million reported in the same period of the previous financial year, mainly driven by 584% surge in the general and administration expenses and 88% surge in the Research and Development expenses.
• Net Loss slightly narrowed to CAD 3.524 million and loss per share stood flat at CAD 0.04 cents against the corresponding quarter of the previous financial year.
• Cash and Cash equivalent position significantly bolstered to CAD 7.36 million at the end of September 2020 quarter against CAD 3.79 million at the end of December 2019.

Risk: The company is yet to report profit from its operations. Further, the operating expense continue to increase, which is an area of concern.

Stock Recommendation: The company’s top line jumped substantially by 36% in the third quarter of 2020, against the year-over period. Further, the company’s liquidity significantly bolstered in the third quarter. Moreover, its shares are hovering in a bullish zone, with price traded well above the short-term as well as long-term support level of 50-day and 200-day SMAs. Therefore, considering the above factor and risk associated, we have given a “Speculative Buy” recommendation on the stock at the closing price of CAD 14.75 on December 02, 2020.

Technical Price Chart (as on December 02, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

Western Forest Products Inc.

Western Forest Products Inc. (TSX: WEF) is a Canada-based softwood forest products company, and its principal business activities include timber harvesting, reforestation, forest management, sawmilling logs into lumber and wood chips, and value-added lumber remanufacturing.

Key Highlights:

• Diversified Portfolio: The company derives ~58% of its revenue from specialty lumber, while 18% is being derived from each commodity lumber and logs. Moreover, the products are being sold across several regions (apart from Canada) like the United States, China, Japan etc. We believe, WEF has widespread market presence, which reduces the business-risk during the economic downturn as its products are not confined within one Geography.

Source: Company Presentations

• Strategic Focus towards high-margin products: The company is exploring growth opportunities across the US Pacific Northwest for specialty wood products, and also enhancing its wholesale lumber segment, which are value-added products. To improve its overall margin, the company is targeting, high-margin products of scale to specific potential customers based on their buying preferences. The above strategies are likely to improve the company’s overall margin in the foreseeable future.
• Elevated Lumber prices: The company has reported elevated lumber prices over the years. Higher lumber prices auger well for margins. Moreover, we believe the commodity prices are likely to be benefited from improved traction from US housing.

Source: Company Presentation

Q3FY20 Financial Highlights:

• WEF announced its quarterly results, wherein the company posted revenue of CAD 290.6 million, significantly higher than CAD 141.6 million in the previous corresponding period (pcp). The increase was driven by significantly higher income from the Lumber and logs segments.
• The company posted an operating income of CAD 17.9 million, as compared to an operating loss of CAD 23.8 million in Q3FY19, supported by a higher income.
• The company reported net income of CAD 11.5 million, as compared to a net loss of CAD 18.7 million in pcp.
• At the end of Q3FY20, the group reported a cash and cash equivalent of CAD 1.9 million, while total assets were recorded at CAD 867.7 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The group might witness a setback from demand cyclicality, which may affect the overall performance.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation: The company has a solid balance sheet with net debt to capitalization ratio of 20% and has available liquidity of ~CAD 127.9 million, which seems sufficient to withstand the current challenging time. Moreover, the company does not have any maturity before August 2022, which augurs well to maintain the liquidity levels. Going forward, the company would be prioritizing on increasing its access to North American Home Centre and ProDealer sales channels. Moreover, the industry estimates that 40% of cedar is consumed within the Home Centre segment, which offers tremendous growth prospects for WEF’s products. We have valued the stock using Price to Earnings-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Interfor Corp, Norbord Inc etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 0.93 on December 2, 2020.

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

EXFO Inc.

EXFO Inc. (TSX: EXF) provides technology solutions which are used by the wireless and wireline network operators within the telecom industry. The company provides several specialized services to communications service providers (CSPs).

Recent Updates:

On December 2, 2020, the company introduced a new fiber, namely FIP-500, which has been designed to vastly improve multi-fiber connector testing in data centers and other telecom networks. The product consists of a high level of automation and best-in-class optical design delivering reliable and repeatable results every time. 

Key Highlights:

• 5G deployment to drive growth: The company is focusing on 5G deployments, Fiber buildouts through its expertise and market leadership in optical time-domain reflectometry (OTDR). The 5G service helps mobile network operators to detect, correlate, analyze, report, geolocate and troubleshoot matters related to network performance, handset behaviour and service usage, which is a key positive looking at the growing mobile users across the globe. Moreover, the company has innovated its IP service assurance offering and is expected to add improved prospects for the company.
• Cost Restructuring: Due to the ongoing pandemic, the company is focusing on cost management which has supported the company’s high-growth segments like fiber, 5G and cloud-native deployments etc. The company opted for employees laid-off during the fourth quarter of FY20, in order to lower its overall costs, which is impressive. Moreover, the Management expects a USD 5 million of cost-savings for FY21 though the restructuring.
• Capital Allocation: The company is focusing on organic growth and is not opting for any major acquisitions in the short-term.

Source: Company Presentations

Q4FY20 Financial Highlights:

• EXF announced its quarterly results, wherein the company posted sales of USD 70.572 million, improved from USD 70.175 million in the previous corresponding period (pcp). The increase was driven by a higher T&M sale, while a lower income from SASS segment remained a drag.
• The company posted a loss before income taxes at USD 2 million, as compared to earnings of USD 0.533 million in the Q4FY19, primarily due to an increase in the cost of sales, higher selling and administrative expense and higher net research and development.
• Net loss widened to USD 3.633 million, as compared to USD 0.227 million in Q4FY19.
• The company reported a cash balance of USD 32.818 million, while total assets were recorded at USD 148.275 million.
• The company reported total bookings of USD 62.975 million, as compared to USD 70.911 million in pcp.

Source: Company Reports

Risks: Further breakout of COVID-19 may affect the shipment and supply chain of the group. Also, as several companies are postponing their capital investments, the company might witness a slowdown in the bookings.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation:

The company has a diversified customer base and operates across more than 100 countries through its direct sales force and channel partners, augurs well for improved prospects with the gradual revival in the economy. The group has a low net debt coupled with revolving credit facilities of USD 44.5 million. The company’s shift in focus for high-margin products like 5G deployments, Fiber buildouts etc., is likely to drive the company’s future margin. We have valued the stock using P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Netscout Systems Inc, Anritsu Corp etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 3.81 on December 2, 2020.

EXF Daily Technical Chart (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.