Spark Power Group Inc

Spark Power Group Inc (TSX: SPG) is a Canada-based provider of electrical power services to industrial, commercial, institutional, renewable, agricultural, and utility customers across North America.

Pros

• Solid free cash free yield of 20.5%, which implies that the company is generating enough cash to satisfy its debt and other obligations

• Relative Price Strength. SPG Shares are outperforming the benchmark over the past 3-Month, YTD basis and YoY basis, which shows solid relative price strength in the stocks as compared to the benchmark.

• Reported solid financial performance in the second quarter of 2020, despite the significant effect of the pandemic on the economy.

• Executed several large customer projects across all markets, despite COVID-19 impact.

• Boasting an LTM ROE of 9.16% for the June quarter.

• The stock traded above the crucial short-term as well as long-term support level of 50-day and 200-day SMAs, which indicates a bullish trend in the stock.

Cons

• Relatively higher debt contribution, which poses some balance sheet risk for the company.

2QFY20: Highlights

• Posted decent second-quarter results amid the significant effect of the pandemic on the economy.

• Second-quarter revenue up by 4.7% to CAD 46.3 million against CAD 44.3 million in a year-over period; however, on a proforma basis, revenue decreased by CAD 8.9 million or 16.1%. Canadian sales were down $11.9 million or 24.3% in the quarter while U.S. sales increased CAD 3.0 million or 46.4%.

• Adjusted EBIDTA for the second quarter surged by 66% to CAD 9.1 million, and on a proforma basis, EBITDA grew by 13.3% on a YoY basis.

• Liquidity improved during the second quarter of FY20 as withdraws on the Company's CAD 30.0 million operating lines decreased to CAD 8.7 million, down from CAD 23.3 million at March 31, 2020

Valuation Methodology (Illustrative): EV to EBITDA based Relative Valuation

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuter)

Stock Recommendation: Amid COVID-19 led challenging business condition, the group’s performance in the second quarter of 2020 was decent, with improved revenue, reduced debt and improved liquidity position. Also, a significantly higher free cash flow yield of the company reflects that the company is generating enough cash to easily satisfy its debt and other obligations. Also, the company is boasting a decent ROE of 9.1%, relatively better than the industry average.

However, higher debt is a concern, and given the small-cap market capitalization of the company, investors are also exposed to steep volatility in the stock price and liquidity risk.

Therefore, based on the above rationale and valuation, we have given a “Speculative Buy” recommendation at the closing price of CAD 1.55 (on September 23, 2020), with lower double digit upside potential.

SPG 1 Year Technical Chart. Source: Refinitiv, Thomson Reuters

Taiga Building Products Ltd.

Taiga Building Products Ltd (TSX: TBL) is a Canada based company. It is engaged in the production and wholesale distribution of building products. The company’s products range includes composite decking, engineered wood, flooring, insulation, lumber, modulings, panels, polyethylene, preserved wood, roofing, and siding.

Q2FY20 Financial Highlights: TBL announced its second-quarter results, wherein the company posted sales of CAD 356.894 million, as compared to CAD 354.723 million in the previous corresponding period (pcp). The increase in sales was primarily due to higher selling prices for its commodity products during the quarter, which was partially offset by a significant decline in volume due to COVID-19. Gross margin stood at CAD 42.741 million, significantly higher than CAD 34.910 million in pcp, thanks to the improved income coupled with a lower cost of sales. Earnings before income tax stood at CAD 18.648 million, as compared to CAD 10.547 million in pcp. The quarter was marked by a higher selling and administrative expenses, while a lower distribution expense, a decline in finance costs and a wage subsidy from Government has supported the overall performance. The group reported EBITDA of CAD 23.9 million, higher than CAD 16.4 million in pcp, supported by improved margins and wage subsidies program. Net earnings for the period stood at CAD 13.148 million, improved considerably from CAD 7.035 million in Q2FY19.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company has encountered higher selling and administrative expenses during the quarter, which is a reason for concern. The ongoing downturn in the economy might lead to a lower sales volume for the company.

Stock Recommendation: The stock of TBL rose ~28% and ~78% in the last three months and six months, respectively. Despite a slowdown in the economy, the company has reported an improved performance, which is commendable. The products of the company are used for construction and engineering segment and are dependent on the overall shape of the economy. The current slowdown in the construction activities has taken a toll on the second-quarter sales volume; however, due to an increase in the commodity prices, the company retained its top line. Going forward, we expect an improved sales volume backed up by gradual uptick of the construction activities. The group has sufficient liquidity with access to a credit facility amounting to CAD 250 million, with an option to increase the limit by up to CAD 50 million. The Facility also features an ability to draw on additional term loans in an aggregate amount of approximately CAD 23 million at favourable rates. The group reported strong performance with LTM Return on Equity (ROE) at ~23.24% and Return on Capital Employed (ROCE) at ~14.22%, which is an indication of strong business activity. The stock of TBL closed higher than its 200-days simple moving average (SMA) of CAD 1.05, indicating a bullish trend. Further, the leading momentum indicator MACD is hovering above its 9-day SMA signal line, and the difference between 12-day and 26-day EMA is positive, which is another positive indicator. On the valuation front, the stock trades at a price to earnings multiple of 4.1x on trailing twelve months (TTM) basis, as compared to the industry (Paper & Forest Products) median of 11.4x. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ on the stock at the closing price of CAD 1.28 on 23 September 2020.

TBL 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.