Diversified Royalty Corp.

Diversified Royalty Corp. (TSX: DIV), formerly BENEV Capital Inc., is a multi-royalty company engaged in the business of acquiring royalties from multi-location businesses and franchisors in North America.

DIV buy trademarks of the companies it is going to acquire. The company generates revenue from the receipt of royalties and management fees from its Royalty Partners. 

Key highlights 

• An Income play:Despite this challenging environment, the company maintained its dividend payment; this shows the group's financial strength. Recently, the company announced a monthly dividend of CAD 0.01667 per share, which equates to CAD 0.20 per common share on an annualized basis. Moreover, the stock offers a healthy dividend yield of 8.26%, which is lucrative, considering the current interest rate environment.

• Rising royalty rate: Effective May 1, 2021, the royalty rate for Mr Lube would increase from 7.45% to 7.95% on non-tire sales, and 13 locations would be added to the Mr Lube royalty pool – resulting in an estimated accretion of over 1 cent to distributable cash per share, which is expected to improve DIV’s payout ratio further.

• Acquired Oxford Learning Centers, Inc.: Recently, the Company acquired the trademarks and certain other intellectual property rights utilized by Oxford Learning Centers, Inc. The Company granted Oxford the license to use the Oxford Rights for a term ending on February 20, 2119, in exchange for a royalty payment initially equal to 7.67% of Oxford locations' gross sales in the royalty pool. As of December 31, 2020, Oxford had 154 locations, of which 146 were in the Oxford Royalty Pool.

• Enhancing liquidity: As of December 31, 2020, the Company had a cash and cash equivalents balance of CAD 9.2 million, increased from CAD 3.0 million in the pcp, and in the same period, the working capital increased to CAD10.2 million from CAD 9.3 million. The Company also hold CAD 50.0 million under its senior secured credit facility. 

Financial overview of FY 2020

Source: Company 

• For FY 2020, DIV generated CAD 30.5 million of revenue, flat compared to CAD 30.5 million in the previous corresponding period.
• The company posted income from operations at CAD 0.7 million, against CAD 26.3 million in 2019. Impairment loss of CAD 26.0 million dragged the income from operations.
• On the back of lower-income from operations and higher interest expense along with fair value adjustment on financial instruments, the company posted a net loss of CAD 8.9 million, against a profit of CAD 14.0 million in the previous corresponding period. 

Risks associated with investment

The company derives its revenue in the form of royalties from different businesses. The recent restrictions imposed on account of the pandemic have caused a tremendous impact on many sectors. Continued pain in the sectors might hinder the group’s performance. 

Valuation Methodology (Illustrative): Price to Cash Flow 

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

Stock recommendation

The second wave of COVID-19 and the new COVID-19 variants resulted in various governments re-imposing restrictions to combat the growing number of cases. Although navigating these restrictions can be challenging, the company's Royalty Partners' management teams remain resilient and dedicated to supporting their franchisees. Furthermore, the company expects to increase cash flow per share by making accretive royalty purchases and through the growth of purchased royalties. Moreover, the stock offers a healthy dividend yield of 8.26%, which is lucrative, considering the current interest rate environment. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating at the closing price of CAD 2.42 as on March 29, 2021.

1-Year Price Chart (as on March 29, 2021). Source: Refinitiv (Thomson Reuters)

Firan Technology Group Corporation

Firan Technology Group Corporation (TSX: FTG) is a supplier of aerospace and defense electronic products and subsystems. The group has two operating segments, namely FTG Circuits and FTG Aerospace.

Key Highlights:

• Constant Decline in Total-debt: Despite the ongoing challenging macro scenario, the company has reduced its total-debt every quarter, backed by stable cash flows. This is a showcase of prudent capital management. A decline in debt also leads to improved financial flexibility for the company. Total debt at the end of Q4 FY20 stood at CAD 19.76 million, lower than CAD 20.47 million and CAD 23.11 million in Q3FY20 and Q2FY20, respectively.
• Increase in Free Cash Flow: During Q4FY20, the company has reported an increase in free cash flow at CAD 4.050 million, depicting a growth of CAD 1.573 million over Q4FY19. The increase was supported by higher net income coupled with lower investment in capital expenditures partially offset by higher working capital requirement.             

Source: Company Report

• Unique Product offering: The company offers products like printed circuits, which are used for the defense and telecommunication sector. The products are unique in nature, while the company also offers customized products as required by the clients. Thus, the group remain a key player within the industry, and we believe the potential remains huge considering the estimated size of the industry (valued at ~USD 8 billion to USD 9 billion).

Q4FY20 Financial Highlights:

• FTG declared its quarterly results, wherein the group reported its revenue of CAD 26.711 million, v/s CAD 27.075 million in the previous corresponding period (pcp). The slight decline was due to the lower orders on account of COVID 19 pandemic.
• Gross margin stood at CAD 7.063 million, increased from CAD 5.870 million in Q4FY19.
• The quarter was marked by slightly lower R&D Investment (CAD 1.318 million v/s CAD 1.339 million in pcp) and an increase in foreign exchange loss (CAD 0.446 million v/s CAD 0.253 million in pcp).
• The group reported net earnings of CAD 1.278 million, stood higher than CAD 0. 608 million in pcp.
• The group reported cash and cash equivalent of CAD 19.032 million, while total assets were recorded at CAD 86.676 million.

Q4FY20 Income Statement Highlights (Source: Company Report)

Risks: The operations of the company are dependent on the aviation segment. Due to the ongoing COVID 19 situations, the demand for the group’s offerings.

Stock Recommendation:

Despite a slowdown in aviation, the company has reported a stable operation in Q4FY20. The business jet activity has recovered rapidly and is now near pre-pandemic levels, which is encouraging. However, the defense and helicopter segment was fairly stable in the recent past. In order to cut-down the overall costs, the company has reduced the headcounts by ~7% on y-o-y basis during FY20. The company reported available liquidity of CAD 56.116 million, higher than CAD 51.154 million in pcp, which seems sufficient to meet the current working capital needs. Moreover, the company has an unused credit facility of ~CAD 22.50 million, which would further enhance the overall liquidity. On the valuation front, the stock is trading at a forward P/E multiple of 9.6x on NTM basis, as compared to the industry (Aerospace & Defense) mean of 29.2x. Hence, considering the above rationale, we give a ‘Speculative Buy’ rating on the stock of FTG at the closing price of CAD 2.13 on March 29, 2021.

One-Year Price Chart (as on March 29, 2021). 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.