Spark Power Group Inc

Spark Power Group Inc (TSX: SPG) is independent provider of end-to-end electrical contracting, operations and maintenance services, and energy sustainability solutions to the industrial, commercial, utility, and renewable asset markets across North America.

Key Highlights: 

• Solid growth from renewables segment: The firm saw a significant increase in revenue from the renewable business in FY2020, and the momentum continued in Q1 2021 also which accounted for over 30% of total revenue in Q1 2021, thanks to the latest acquisitions of 3-Phase and One Wind projects and strong demand for its U.S. wind services. Furthermore, the company's green division caters to fast-growing markets such as Battery Energy Storage Systems (BESS) and Electric Vehicles (EVs), which is a significant plus. We anticipate that the above momentum would continue in the coming days, bolstering the cash flows of the company.
• Experiencing positive signs of revival: During FY2020, the company's facilities stayed entirely operating, since the service and goods are considered essentials and are not affected by economic cycles. Furthermore, the company obtained funding from the Canadian government in the form of subsidies, as well as from the US government, which helped the company stay afloat through difficult times. In particular, the company is experiencing positive traction in new bookings in FY2021, helped by improving business conditions. Revenues, new bookings, and consumer engagement are expected to remain strong in FY2021, and management expects margins to increase due to lower costs associated with COVID-19 protocols. 

• Utilizing customer database for organic growth: Recently the company announced that current and established consumers in California would be able to take advantage of solar technologies. To meet the rising demands of the solar market, the organization is focused on leveraging its local footprint and customer partnerships, as well as its technological and sustainability capabilities.

Financial overview of Q1 2021 (in thousands of Canadian dollars)

Source: Company

• In Q1 2021, the company posted a revenue increase of 4.7% to CAD 56.0 million, against CAD 53.5 million in the previous corresponding period. The group reported higher revenues from Renewables segments, which accounted for over 30% of total revenue in the first quarter.
• Gross profit stood higher at CAD 14.1 million compared to CAD 13.3 million in pcp, supported by a higher income.
• Income from operations improved and stood at CAD 1.4 million, against a loss of CAD 0.05 million in Q1 2020, primarily attributable to decrease in selling, general and administrative costs at CAD 12.5 million v/s CAD 13.3 million and positive change in fair value of derivative instruments.
• The company minimized its comprehensive losses to CAD 0.07 million compared to a loss of CAD 2.3 million in pcp.

Risk associated with investments

The company reported a surge in its total debt due to working capital requirements, capital expenditures and debt service requirements. Continuation of the above trend would lead to higher finance costs, which would dampen the company’s profitability.

Stock Recommendation

Despite the challenges posed by the COVID-19 pandemic, the company achieved sales growth of more than 26.8%, from its Spark’s renewables business segment leading the way in Q1 2021. Thanks to the increasing introduction of green energy, the renewables segment is expected to continue to expand in the coming days. Furthermore, the company's new approach of leveraging its current market footprint and customer partnerships in California is expected to help the company expand organically. Based on technical analysis, the stock has a support at CAD 1.30 level. On the valuation front, the stock is available at forward EV to Sales multiple of 0.7x, which is significantly lower compared to the industry median of 1.9x. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ Rating on the stock at the closing price of CAD 1.60 on May 17, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock if the price closes below the support level.

One-Year Price Chart (as on May 17, 2021). Source: Refinitiv (Thomson Reuters)

Questor Technology Inc.

Questor Technology Inc. (TSXV: QST) is an environmental cleantech company which is active in Canada, the United States, Europe and Asia. It is focused on clean air technologies that improves air quality, supports energy efficiency and greenhouse gas emission reductions.

Key Highlights

• Enhancing regulations creates demand for the Company’s services:  The United States Environmental Protection Agency (EPA) issued regulations to reduce harmful air pollution arising from crude oil and natural gas industry activities with a particular focus on the efficient destruction of volatile organic compounds (VOC’s) and hazardous air pollutants (HAP’s). After this, California has banned open flaring by 2021, and other US states are working on enhancing regulations to deal with waste gas emissions. Mexico set a target to reduce methane emissions by 75% by 2025. We believe all these regulations create an opportunity for the Company to eliminate the venting through its clean combustion technology.

• Fulfilling client’s requirements from small scale to large scale:The Company’s highly specialized technical team works with the client to achieve 99.99% combustion efficiency. The incinerators vary in size to accommodate small to large amounts of gas handling ranging from 20 mcf/d to 5,000 mcf/d. The Company’s incinerators are currently used in multiple segments of the energy infrastructure industry, including drilling, completions, production, midstream, downstream, transportation and distribution, providing ample diversity.

• Decent financial position: The company continues to maintain a strong financial position with CAD 15.7 million in cash accomplished through managing costs and maintaining capital discipline. We believe this would serve as a foundation to launch into new products and markets as the economy rebounds. 

Financial overview of Q1 2021 (Stated in Canadian dollars)

Source: Company

• In Q1 2021, the company posted lower revenue, which fell by 66% to CAD 1.5 million against CAD 4.4 million in Q1 2020. Revenue decreased primarily due to lower performance from all the segments due to lower activities in oil & gas industry.

• The company reported a gross profit of CAD 0.03 million in Q1 2021 compared to a gross profit of CAD 1.9 million in the previous corresponding period.

• On the back of lower revenue, the company posted a net loss of CAD 0.7 million in the reported quarter against a profit of CAD 1.3 million in pcp.

Risks associated with investments

Global slowdown in macroeconomic environment and a lower crude oil demand offtake are the key risks for the company as it can have significant decline in demand for their equipment and services.

Valuation Methodology (Illustrative): EV to Sales

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

Stock recommendation

The Company’s operations and financial performance have suffered negative economic impacts, as COVID-19 and the macroeconomic environment continues to have a significant effect on the oil & gas industry, which curtailed its production. During the Q1 2021, many governmental health restrictions on economies around the world have started to lessen. This has been especially true in the United States. However, in recent weeks certain areas have seen a renewed level of economic restrictions as the pandemic’s next wave takes hold in markets such as Canada and India. Furthermore, the Company believes that the focus on ESG matters combined with an improved economic outlook and a stronger oil and natural gas commodity price environment would result in improved performance in the second half of 2021 and beyond. Based on technical analysis, the stock has support at CAD 1.58 level. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 1.93 on May 17, 2021. We have considered Computer Modelling Group Ltd, Pulse Seismic Inc, Total Energy Services Inc, etc. as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

1-Year Price Chart (as on May 17, 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.