Photon Control Inc.

Photon Control Inc. (TSX: PHO) manufactures fiber optic process monitoring systems for the semiconductor industry.

Key Highlights:

• Improved Order Backlog: The company reported a higher order backlog of CAD 27.031 million, increased significantly from CAD 11.921 million, a year ago. The increase was driven by the improved demand dynamics from the semiconductor industry, as it showed a gradual sign of recovery.                             

Source: Company Presentations

• Robust top line: In the recent past, while most of the businesses are struggling to retain the top-line levels, PHO posted solid revenue growth in the recent quarters. Moreover, the company managed to report its EBITDA margin close to ~40%, which is impressive.                  

Source: Company Presentations

Q3FY20 Financial Highlights:

• PHO announces its quarterly results, wherein the company posted revenue of CAD 16.33 million, significantly higher than CAD 8.742 million in the previous corresponding period (pcp). The tremendous growth is driven by the company’s entry to the WFE market, which further fueled the company’s market share.
• The company posted a gross profit of CAD 10.205 million, as compared to CAD 4.791 million in Q3FY19, thanks to the higher revenue, partially offset by higher cost of sales.
• The company posted its operating income of CAD 5.752 million, significantly higher than CAD 1.721 million in pcp, supported by a higher gross profit, partially offset by higher general and administrative expense, increase in research and development and significantly higher sales and marketing.
• Net income of the company stood at CAD 3.607 million, as compared to CAD 1.487 million, a year ago.
• The company reported cash and cash equivalent of CAD 46.576 million, while total assets stood at CAD 77.347 million.                   

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company's top three customers are accounted for 80% of the total revenue; therefore, the action of even a single customer could have an unfavourable impact on the group's financials. Further, many of its markets are characterized by continuous technological advances, evolving industry standards, shifting customer needs, new product introductions and enhancements, and the periodic introduction of disruptive technology that displaces current technology due to a combination of price, performance and reliability. If its products are not designed into successive generations of its customers' products, the group will lose significant revenues during the lifespan of those products.

Valuation Methodology (Illustrative): EV to Sales

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

Stock Recommendation:

The company intends to invest in product innovation and new product development in order to cater to the growing demand across the semiconductor industry, which is likely to support the company’s market expansion. Recently, the company has entered into the distribution agreement with Woowon Technology Co, a leading Korean distributor, which is a key positive. The company’s recent focus on broadening its market presence through acquisitions and partnerships is likely to drive added revenue in the foreseeable future and is a key positive. Moreover, the stock of PHO closed above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend. 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 peers like Martello Technologies Group Inc, Vitalhub Corp, etc. as a peer group. Considering the above-mentioned facts, current trading levels, improved macro scenario, we recommend a ‘Speculative Buy’ on the stock at the current closing price of CAD 1.86 on December 8, 2020.

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

Supremex Inc

Supremex Inc. (TSX: SXP) is engaged in the manufacturer and distribution of a wide range of custom envelopes and packaging products. The corporation operates across two business segments, which are Manufacturing and Sale of Envelopes, and the manufacturing and sale of paper-based packaging solutions and specialty products.

Key Highlights:

• Cost-efficiency measures: Recently, the Management indicated that the company would further focus on cost efficiency measures in order to combat the ongoing secular decline in the legacy envelope business and realize synergistic opportunities resulting from the acquisition of Royal Envelope. The company would reduce its workforce by 5%. The company is likely to report CAD 2.4 million of annual cost savings.
• Improved Margins: The company showed improvement in its operational performance and delivered an EBITDA margin of 15.5% for 9MFY20, versus 13.1%, a year ago. The improvement was primarily driven by improved product mix and a higher contribution from the packaging and specialty segment. We believe, with the improvement in the overall demand scenario backed by a gradual revival of the economy, the company’s performance is likely to improve further.

Source: Company Reports

Q3FY20 Financial Highlights:

• SXP announced third quarter FY20 results, wherein the company posted total revenue of CAD 49.89 million, reflecting a growth of 10.4% on y-o-y basis. The increase was driven by higher revenue from Packaging and Specialty Products segment (up 18.9% y-o-y) and Envelope segment (6.9% y-o-y).

Quarterly Revenue Bifurcation (Source: Company Reports)

• EBITDA surged 49.3% on y-o-y basis to CAD 8.1 million, partially supported by assistance from the Canadian Emergency Wage Subsidy ("CEWS") program amounting CAD 0.9 million.
• Operating earnings stood higher at CAD 4.561 million, compared to CAD 2.627 million in the previous corresponding period (pcp).
• The company posted its net earnings of CAD 2.733 million, as compared to CAD 1.176 million in Q3FY19.
• The company reported a cash balance of CAD 4.90 million, while total assets stood at CAD 196.278 million.

Q3FY20 Income Statement (Source: Company Reports)

Risk: The company’s products, especially from the envelopes segment might witness a slowdown due to the seasonality. Further breakout of COVID-19 may impact the demand and hamper the supply chain.

Valuation Methodology (Illustrative): EV to Sales based

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

Stock Recommendation:

The stock of SXP appreciated ~30% and ~12% in the last three months and six months, respectively, due to an improved product-mix which led to margin expansion. The business witnessed a solid operational growth and posted net cash flows from operating activities of CAD 26.1 million during 9MFY20, as compared to CAD 11.7 million, a year ago, which indicates robust earnings growth despite the ongoing slowdown and is commendable. 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 peers like Resolute Forest Products Inc, Verso Corp etc. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 1.69 on December 08, 2020.

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

Baytex Energy Corp.

Baytex Energy Corp. (TSX: BTE), is a North American focused oil and gas company which is engaged in the acquisition, development and production of crude oil and natural gas in the Western Canadian Sedimentary Basin and in the Eagle Ford in the United States. The Company has oil and gas operations in Canada and the United States.

Key highlights

• Reaffirmed guidance for FY2020: The company reaffirmed its production guidance to 80,000 boe/day from its earlier direction of 78,000 – 82,000 boe/day. The group reduced its FY2020 operating expense guidance by 7% to CAD11.20 to CAD11.40.

Source: Company

• Reduced net debt and generated Free Cash Flows:The company managed to reduce its net debt by CAD 89 million during the third quarter through a combination of free cash flow and got support from the strengthening of the Canadian dollar relative to the U.S. dollar. The company generated free cash flow of CAD 60 million in Q3 2020, and cumulative of CAD 787 million since FY16 till date through Eagle Ford. Furthermore, improved drilling activities are likely to support the company’s free cash flow levels.

Financial overview of Q3 2020 (In CAD thousands, except per share amounts)

Source: Company 

• In Q3 2020, the company’s reported total revenues decreased by 39% to CAD 212.48 million, as compared to CAD 349.58 million in the previous corresponding period (pcp). The decline was primarily due to lower income from petroleum and natural gas sales from both operating regions of North America.
• The company posted net loss before income tax of CAD 22.42 million as against a profit of CAD 16.7 million in pcp.
• Net loss reported by the company in Q3 2020 stood at CAD 23.44 million against a profit of CAD 15.15 million in pcp. Primarily on the back of low revenues due to low weighted average sales price which stood at CAD 33.79/boe for Q3 2020 against CAD 47.14/boe in Q3/2019. 

Risks associated with investment

As the company is in exploration business of oil and gas, hence their revenues are correlated to the oil prices. Any volatility in oil prices is likely to affect the group’s performance. Other factors which could impact their financial performance include low demand for oil and gas, and financial risk on behalf of its hedged positions. 

Stock Recommendation

Global crude oil prices have begun to recover and were relatively stable during Q3 2020, as members of OPEC agreed to production curtailments and governments also eased some restrictions that allowed economies to begin reopening, which increased demand. The company also reaffirmed its FY2020 guidance, which is encouraging. On the valuation front, the stock trades at a significantly lower price to cash flow multiple of 1.3x on Next Twelve Months (NTM) basis, compared to the industry (Oil & Gas) mean of 4.3x. Hence considering the facts mentioned above and rationales, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 0.81 on December 8, 2020.

Source: Refinitiv (Thomson Reuters)

Nuvista Energy Ltd

Nuvista Energy Ltd (TSX: NVA), is a Canada-based company, which is engaged in exploration, development and production of oil and natural gas reserves in the Western Canadian Sedimentary Basin. The Company's primary focus is on Montney formation in the Alberta Deep. 

Key highlights

• Uplifted production levels: Despite volatile economic conditions, the group has maintained its production levels, which reflects the operational resiliency. For FY 2020 and FY 2021, the group expects its production to remain at or above 50,000 Boe/day.

Source: Company

• Curtailing Operating costs: The company reported a lower operational cost over the years, driven by improvement in drilling performance and continuous focus on placing proppant more efficiently while increasing completions intensity. This reduction in operating cost would augur margins improvement.

Source: Company

• Healthy cash flow generation: Despite the ongoing slowdown coupled with demand destruction scenario, the company has maintained its cash flow levels. During the second half of FY 2020, the company is likely to generate cash flow of CAD 80 million, while for FY2021 cash flows are expected to be around CAD 200 million to CAD 265 million.

Source: Company

Financial overview of Q3 2020

Source: Company

• In Q3 2020, The company’s petroleum and natural gas revenues decreased 24% to CAD 105.7 million as compared to CAD 138.7 million in the previous corresponding period. The decline was driven by a 20% decrease in average per Boe realized price and decrease in production by 5% for the quarter.
• Total Operating expenses stood at CAD 117.7 million decreased by 12.7% in Q3 2020, as against CAD 134.8 million in pcp.
• Net Loss reported by the company stood at CAD 44.1 million as compared to CAD 7.6 million in Q3 2019, primarily due to lower income.

Risk associated with investment

The company is exposed to various market risks in the ordinary course of operations that could impact its earnings and cash flows. Some important risk factors include lower demand, lower production, and volatility in crude prices. The company also enters physical and financial derivative contracts to manage exposure to fluctuations in commodity prices and foreign exchange rates.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock recommendation

Global crude oil prices have begun to recover and were relatively stable during Q3 2020, as members of OPEC agreed to production curtailments and governments also eased some restrictions that allowed economies to begin reopening, which increased demand. During the second half of FY 2020, the company is likely to generate cash flow of CAD 80 million, while for FY2021 cash flows are expected to be around CAD 200 million to CAD 265 million on the back of improved production and bringing down the operation costs, which looks encouraging. Therefore, based on the above rationale and valuation done using the above methodology, we have given a “Speculative Buy” rating at the closing price of CAD 1.0 as on December 8, 2020. We have considered Crescent Point Energy Corp, Birchcliff Energy Ltd, Bonterra Energy Corp, etc. as the peer group for the comparison.

1-Year Price Chart (as on December 08, 2020). Source: Refinitiv (Thomson Reuters) 

Crown Capital Partners Inc.

Crown Capital Partners Inc. (TSX: CRWN) provides investment management services and is a specialty finance company which offers capital to middle-market companies. The firm offers long-term financing and special situation financing. 

Key Highlights:

• Diversified Revenue-base: The company has a balanced portfolio as far as the revenue generation is concerned, which supports the company’s risk management and avoids the risk of revenue generation from a particular stream or region.

Source: Company Presentation

• Increased Insider Buying: The insiders have increased stake in the company four times so far this year. And all the buy transactions done by insiders are after the stock price crash. This implies that insiders are bullish on the group’s future performance and using the recent crash as an opportunity to buy shares at a discounted price and valuation.

Source: Refinitiv (Thomson Reuters)

• Transitioning to a capital light model: The company reduced ownership in lending assets to CAD 25 million. Further the company has more than CAD 60 million of funds available for distribution to be used for strategic investments, share buybacks and deleveraging.
• Stock hovering in a bullish zone: At the last close, shares of CRWN traded well above the crucial short-term moving averages and exponential moving averages of 50-day, which implies an uptrend in the stock. Also, the Moving Average Convergence Divergence (MACD) is rising and hovering above its 9-day SMA signal line, with the difference between 12-day and 26-day EMA is positive, which is another bullish trend.

Q3FY20 Financial Highlights

• CRWN announced its quarterly results, wherein the company posted total revenue of CAD 12.592 million, higher than CAD 7.968 million in the previous corresponding period. The increase in revenue was supported by the absence of a net realized loss from investments amounting CAD 10.796 million, which was present in the previous corresponding period (pcp).
• Total expenses stood significantly higher at CAD 18.744 million, as compared to CAD 4.849 million in Q3FY19, due to a provision for credit losses amounting CAD 11.153 million, an increase in finance costs, increase in general and administration costs, higher performance bonus etc.
• The company reported a loss before adjustments and income taxes at CAD 6.152 million, as compared to an income of CAD 3.119 million in Q3FY19.
• CRWN reported a net loss of CAD 8.078 million, as compared to a net income of CAD 0.460 million in pcp.
  • Cash and cash equivalents stood at CAD 17.935 million, while total assets stood at CAD 325.527 million.                     

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to any adverse economic conditions, interest rates volatility, etc. the company might witness higher provision for credit losses, which might act as a drag to the profitability.

Valuation Methodology (Illustrative): Price to Book Value

All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Stock Recommendation:

The company is focusing on increasing market opportunity by focusing on recurring revenue assets. The company is also focusing on improving the contribution of non-investment earnings. Moreover, the company is also focusing on the repositioning of balance-sheet for a capital-light model, in order to increase its capital efficiency, while the management also indicated that it would focus on increasing its EPS over the next 12 months to 24 months. Further, increasing insiders buying amid challenging times is a good sign for the existing and potential shareholders’ perspective. This shows that management is bullish on the group’s prospect. We have valued the stock using the price to book value relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like FS KKR Capital Corp, Apollo Investment Corp, etc. as a peer group. Hence, considering the above facts, current trading levels, we have given a ‘Speculative Buy’ on the stock at the current closing price of CAD 4.75 on December 08, 2020.

CRWN 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.