CRH Medical Corporation

CRH Medical Corporation (TSX: CRH) is a healthcare products and services company, which provides anesthesiology services to gastroenterologists in the United States. The corporation also specializes in the treatment of hemorrhoids utilizing its treatment protocol and patented proprietary technology. 

Key Highlights:

• The company announced that it had received notice that its largest customer, United Digestive (UD) does not intend to renew its professional services agreements pursuant to which CRH provides anesthesia services to 12 of UD's surgery centers in the Greater Atlanta Georgia market. UD represents a significant portion of CRH's revenue and is expected to represent approximately 20% of adjusted operating shareholder EBITDA in 2021. The current professional services agreements are scheduled to expire on October 31, 2021, meaning that the non-renewal will become effective sometime thereafter, such that the effect on CRH's financial results will be seen beginning in 2022.
• On December 14, 2020, the company reported the completion of an accretive transaction whereby the CRH would acquire 51% interest in FDHS Anesthesia, LLC, which has a gastroenterology anesthesia practice company, located in Sarasota, Florida. With the above acquisition, the company expects an additional ~USD 3 million of yearly revenue.

Q3FY20 Financial Highlights:

• CRH announces its quarterly results, wherein the company posted revenue of USD 30.349 million, at par with USD 30.414 million in the previous corresponding period (pcp). The company has retained its top-line, supported by a stable performance from both of its segments.
• Operating income plunged to USD 0.084 million, from USD 3.71 million in pcp. The decline was primarily attributed to higher expense, which stood at USD 30.26 million, versus USD 26.702 million in the previous corresponding period.
• The company posted a loss before income tax of USD 0.067 million, against an income of USD 2.66 million in Q3FY19, due to a lower operating income, partially supported by a lower finance expense.
• The company posted net income of USD 0.31 million, as compared to USD 2.099 million, a year ago, partially supported by an income tax recovery.
• The company reported cash and cash equivalent of USD 5.099 million, while total assets stood at USD 214.247 million.                    

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company is battling with rising input costs and low margins, and continuation of the above trend would be an area of concern for the company.

Stock Recommendation:

The company’s biggest cline UD has declined to renew the contract, which is likely to affect the company’s EBITDA. Consequently, the stock slumped ~20.8% on TSX. The company intends to continue discussions with UD regarding a new agreement, but it is not clear that an agreement will be reached on terms acceptable to the company or at all. The company believe that it can replace much of EBITDA lost through acquisitions and organic growth throughout 2021 and mitigate the potential financial impact in 2022. Moreover, the company’s gross margin and net margin stood relatively low at 7.6% and 1%, respectively during Q3FY20, as compared to the industry median of 31.9% and 3.5%. Thus, considering the above factors, we prefer to remain on the sidelines. Hence, we have given a ‘Watch’ stance on the stock at the closing price of CAD 2.81 on December 22, 2020.

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

Dynacor Gold Mines Inc

Dynacor Gold Mines Inc (TSX: DNG) is a Canada-based gold production corporation. It is engaged in production activity through the government approved ore processing operations.

Key Highlights:

• Strong Insiders Buying: Insiders buying was quite strong in the DNG counter over the past three months, and despite a couple of insiders selling, insiders remain the net buyer in 2020. This reflects that the insiders are bullish on the group’s future performance. Insider buying provide a lot of confidence to retail shareholders in case of Penny-cap stocks.

Insiders Buying. Source: Refinitiv (Thomson Reuters)

• Dynacor Returns to Profit in Q3FY20: The company returned to positive EBITDA in the third quarter of 2020. The company reported EBITDA of CAD 2.7 million, including a CAD 0.3 million of a write-off of exploration and evaluation assets, compared to (-CAD 0.1 million in Q2-2020) and CAD 4.1 million in Q3-2019, as Sales rapidly resumed after reopening. Sales amounted to CAD 24.1 million in Q3-2020, compared to CAD 8.0 million in Q2-2020 and CAD 33.7 million in Q3-2019.

• Virtually Debt Free: The company has virtually zero debt in its balance sheet, with Debt/Equity ratio at the end of the third quarter stood at 0.01x, with Solid cash position. Cash on hand stood at CAD 16.6 million in Q3-2020 compared with CAD 6.7 million at the end of 2019.

Financial Highlights: Q3FY20

Source: Company Filing

• Sales amounted to CAD 24.1 million in Q3-2020, compared to CAD 8.0 million in Q2-2020 and CAD 33.7 million in Q3-2019.
• Gross operating margin came in at CAD 3.3 million (13.5% of sales) compared to CAD 0.0 million in Q2-2020 and CAD 4.6 million in Q3-2019.
• Cash flow from operating activities before change in working capital items stood at CAD 2.3 million (CAD 0.06 per share), compared to CAD 0.0 million in Q2-2020 and CAD 3.0 million (CAD 0.08 per share) in Q3-2019.
• Cash on hand stood at CAD 16.6 million in Q3-2020 compared with CAD 6.7 million at year-end 2019.
• The board of directors have announced a Quarterly dividend of CAD 0.015 per share.

Risk Associated to Investment: The company is exposed to the next wave of COVID-19 outbreak, which can hamper the group’s operations.

Stock Recommendation:  The company reported decent performance in the third quarter of 2020, as Dynacor returns to profit in Q3FY20, and also reported the highest cash gross operating margin per ounce since 2014. Further, the company’s TTM ROE stood at 6.42%. Recently the shares of DNG entered a bearish trading zone, with price traded below the crucial short-term as well as long-term support levels of 50-day and 200-day SMAs. On the valuation front, the stock is trading at a forward EV/EBITDA multiple of 3.1x, which is more or less in line with the industry median of 3.5x. Therefore, considering the above rationale and technical weaknesses in the stocks, we recommend a “Watch” recommendation at the closing price of CAD 1.79 on December 23, 2020.

1-Year Price Chart (as on December 23, 2020). Source: Refinitiv (Thomson Reuters)

Disclaimer

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