Pason Systems Inc

Pason Systems Inc. (TSX: PSI) is a leading global service provider of specialized data management systems for drilling rigs. Its solutions include data acquisition, wellsite reporting, remote communications, web-based information management, and analytics, enable collaboration between the rig and the office. 

Key highlights

• Strong competitive position: In Q1 2021, the company maintained its strong competitive position. Revenue per industrial day in North America was CAD 720, which was down 2% on Y-o-Y basis and constant from the previous quarter. International revenue, on the other hand, was down 24% on Y-o-Y basis but up 23% sequentially as industry activity improved across our major operating regions.

• Improving scenarios for US Drilling Activity: Many indicators point to continued land drilling activity in North America, which is a huge positive for the company. Land rig counts in North America were down 45% in Q1 2021 compared to the previous corresponding period, but they are up more than 90% from their low point in the summer of 2020.

• Industry beating margins: Despite the hard time, the management’s solid determination helped them leaping the industry median margins on many fronts in Q1 2021, which is a key positive. The chart below gives a glimpse of this.

• Advancing in the solar and energy storage market: Through Energy Toolbase, the company continues to enhance its efforts in the solar and energy storage markets (ETB). With a huge subscriber base, its software package for economic research and proposal creation remains a popular choice among project developers. Bookings for new installations and a pipeline of possibilities for the company's energy storage control system continue to grow, providing an additional source of cash flow.
  

• Event update: The company intends to release its Q2 2021, financial results after the markets close on August 10, 2021.

Financial overview of Q1 2021

Source: Company 

• The company generated CAD 42.6 million in revenue in Q1 2021, a 42% reduction from CAD 74.0 million induced in the previous corresponding period. The decline in revenue was primarily due to lower performance from the North American business unit and the international business unit.
• Gross profit for the reported period fell to CAD 15.8 million, against CAD 34.4 million in pcp, primarily due to lower revenues, partially benefited from lower operating expenses.
• The company reported Income before Income taxes at CAD 5.2 million compared to CAD 23.5 million in pcp, partially offset by higher stock-based compensation and benefitted from extra other income.
• Net income for the reported period declined to CAD 3.9 million, against CAD 16.5 million in pcp, primarily due to rationales discussed above.
  

Risks associated with investment

Due to high dependency on the oil and gas clients, the adverse effect on crude oil demand can hit the company's revenues. Lower demand for crude oil would result in lower drilling activity, which would impact the company's prospects.

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The Company continues to invest in the technology and service capabilities it needed to retain its competitive position. When the demand recovers, we believe it would be able to create considerable extra revenues by putting these skills in place. Further, numerous signs indicate to land drilling in North America is continuing to grow, which is important for the company. Furthermore, the business continues to extend its efforts in the solar and energy storage markets through Energy Toolbase, with good bookings for new installations and a growing pipeline of possibilities for the firm's energy storage control system, which provides a new source of cash flows. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 8.07 on July 26, 2021. We have considered Computer Modelling Group Ltd, Mullen Group Ltd, Aspen Aerogels 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.

Technical Analysis Summary

One-Year Technical Price Chart (as on July 26, 2021). Source: REFINITIV, Analysis by Kalkine Group

Enerflex Ltd

Enerflex Ltd (TSX: EFX) is a company which engineers, designs, manufactures and provides aftermarket support for equipment, systems and turnkey facilities used to process and move natural gas from the wellhead to the pipeline. 

Key highlights 

• Rising global energy demand: The global energy demand is satisfied by a diverse fuel mix, and natural gas is the world’s fastest-growing source of fossil fuel. Global natural gas consumption is projected to increase by over 40% from 2020 to 2050. We believe this scenario would benefit the company as it is in the business of providing services and turnkey facilities used to process and move natural gas from the wellhead to the pipeline.

• Improved gross margin across segments: In Q1 2021, the company witnessed a higher gross margin in rental and aftermarket services segments to 63.8% and 24%, respectively V/s 62.4% and 22.6% in the previous corresponding period. However, the gross margin in engineered systems dropped to 14.7%.

Source: Company

• Positive free cash flow: The company has a solid track record of consistently generating free cash flows, which is commendable. In the first quarter of 2021, its free cash flow climbed to CAD 17.3 million from the outflow of CAD 16.4 million in the previous equivalent period. The increase in free cash flow was mostly attributable to decreased property, plant, and equipment (PPE) costs and decreased growth capital expenditures on the rental fleet.

• Industry beating margins: The Company maintained its pace and witnessed spirited performance across its margin matrix. In addition, the management’s solid determination helped them leap the industry median margins on many fronts in Q1 2021, which exhibits the competitive advantage of the company within the industry. The chart below gives a glimpse of this. 
  

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the company reported lower revenues which stood at CAD 203.2 million, against CAD 365.7 million in the previous corresponding period.
• The operating income stood at CAD 7.0 million in Q1 2021, against CAD 50.2 million in pcp. The decline in operating income primarily due to reduced Engineered Systems revenue on lower bookings in recent periods, driven by uncertainty around commodity price stability and the ramifications of COVID-19.
• The company reported earnings before income tax of CAD 1.5 million against CAD 44.0 million in pcp.
• Despite lower gross profit the company posted a net income of CAD 3.0 million, against CAD 37.4 million in pcp, primarily on the back of lower interest expense and negative income tax.

Risks associated with investment

The company caters to oil-producing companies, and due to uncertainty around commodity price stability and the ramifications of COVID-19, the companies have curtailed their capital investments. Continuation of such a trend would hamper the group’s performance.

Valuation Methodology Illustrative: EV by Sales

Stock recommendation

The group’s Engineered Systems bookings totaled CAD 98.7 million, down from CAD 155.4 million in the same period last year. Although first-quarter bookings were healthier than cycle lows, bookings activity continued to be impacted by restrained spending within the oil and gas industry. The increase in backlog in the quarter is good news. However, the company cautiously sees it as a strong signal of an inflection point in the market. Its pipeline of new opportunities is slowly improving both quality and quantity, but North American oil and gas operators continue to exhibit a cautious approach to growth capex. Moreover, it maintained its balance sheet strength by managing working capital and reducing debt. It reported bank-adjusted net debt to EBITDA ratio of 1.37:1, compared to a maximum ratio of 3:1. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 7.43 on July 26, 2021. We have considered Mullen Group Ltd, Precision Drilling Corp and Ensign Energy Services Inc, etc., as a peer group for comparison.

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

Technical Analysis Summary

One-Year Technical Price Chart (as on July 26, 2021). Source: REFINTIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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.