EXFO Inc.

EXFO Inc. (TSX: EXF) provides technology solutions for wireless and wireline network operators across the telecom industry. The company serves the communications service providers (CSPs) and data centre, cloud and webscale operators with a field test along with many other services.

Key highlights 

• 5G deployment to drive growth: The company is focusing on 5G deployments and fibre buildouts through its expertise and market leadership in optical time-domain reflectometry (OTDR). The 5G service helps mobile network operators to detect, correlate, analyse report and troubleshoot matters related to network performance, and service usage. 

• Diversified customer base: The company sells its products to a diversified customer base in approximately 100 countries through the direct sales force and channel partners, such as sales representatives and distributors. Most of the sales are denominated in US dollars, Euros and Canadian dollars. No customer accounted for more than 10% of its sales, with the top customer representing 9.8% of the group’s sales in FY2020. We feel that this diversification provides reasonable protection against the concentration of sales and credit risk.

Source: Company 

• Healthy Capital Resources:As on August 31, 2020, cash and short-term investments totalled USD 33.7 million, increased USD 14.3 million in fiscal 2020, compared to 2019 and working capital stood at USD 35.2 million. The management believes that its cash balances and short-term investments, combined with available revolving credit facilities of up to USD 44.5 million, will be sufficient to meet liquidity and capital requirements for the foreseeable future. 

Financial overview of Q4 2020 (in thousands of US dollars)

Source: Company 

• Sales in Q4 2020 stood at USD 70.6 million, registered a muted growth, compared to USD 70.2 million in the previous corresponding period. The company witnessed higher T&M sale, while a lower income was clocked from SASS segment.
• The company reported negative EBIT of USD 2 million in Q4 2020, as against a profit of USD 0.5 million in Q4 2019. Higher cost of sales coupled with high operating expenses dragged the EBIT into negative territory.
• On the back of higher income tax in the reported quarter, the Net loss escalated to USD 3.6 million as compared to net loss of 0.2 million in the previous corresponding period. 

Risks associated with investment

Further breakout of Covid-19 may affect the shipment and supply chain of the group. Also, as several companies are postponing their capital investments, the company might witness a slowdown in the bookings. 

Valuation Methodology (Illustrative): Price to Earnings 

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

Stock recommendation

In FY21, the Company would continue to strengthen its focus on high-growth drivers like fibre, 5G and cloud-native deployments, while reducing investments in lower-growth areas. These initiatives should continue to benefit the group’s competitive position and enable profitable growth in future. Therefore, based on the above rationale and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 4.11 on December 21, 2020. We have considered Netscout Systems Inc, Anritsu Corp, Viavi Solutions Inc, etc. as the peer group for the comparison. 

1-Year Price Chart (as on December 21, 2020). Source: Refinitiv (Thomson Reuters)

AirBoss of America Corp.

AirBoss of America Corp. (TSX: BOS) is a Canada based manufacturer of rubber-based products for the resource, military, automotive and industrial markets. Its activities are organized in the segments of Rubber Solutions, Engineered Products and Corporate. 

Management Updates:

Recently, the company announced the appointment of Stephen M. Ryan, a highly regarded legal advisor based in Washington D.C., to its Board of Directors.

Key Highlights:

• Robust Financials: The company reported a solid top-line and profitability growth over the years, driven by recent acquisitions. We expect the above trend to continue in the coming days, supported by improved traction from North America coupled with diverse customer-base. The company has a stable risk profile as it caters to several blue-chip customers, and no individual customer accounts for more than 10% of net sales.

Source: Company Presentations

• Low Debt component and Ample liquidity: The company has a manageable debt profile along with optimum liquidity. For FY20, the company has access to a revolving loan facility of USD 60 million, while the company is yet to use the above fund. Moreover, the company posted cash from operations of USD 47.869 million for the 9MFY20, significantly higher than USD 12.033 million. The current liquidity level seems sufficient enough to meet the near-term requirements.

Q3FY20 Financial Highlights:

• BOS announced its quarterly results, wherein the company posted net sales of USD 162.745 million, significantly higher than USD 77.173 million in the previous corresponding period (pcp). The increase was primarily due to PAPR sales under the FEMA and HHS contracts, supported by the completion of the merger between the AirBoss Defense business and CSI. However, a tepid performance from Rubber Solutions segment due to the COVID-19 pandemic remained a drag.
• Gross profit soared to USD 45.713 million, from USD 10.585 million in Q3FY19. Results from operating activities stood at USD 28.948 million, significantly higher from USD 2.626 million in pcp, thanks to a higher gross profit.
• Profit before income tax was reported at USD 28.225 million, higher than USD 1.725 million in pcp.
• The company reported profit and total comprehensive income for the period at USD 21.160 million, as compared to USD 1.525 million in pcp.
• BOS reported cash and cash equivalent of USD 43.091 million, while total assets stood at USD 357.359 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company’s business might be adversely affected by fluctuations in the commodity prices, loss of any premium clients etc. Moreover, a weak economic scenario might lead to a fall in demand for the company’s products.

Valuation Methodology (Illustrative): P/Earnings multiple based

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

Stock Recommendations:

The stock gained handsomely, in the recent past and appreciated ~242% and ~87% in the last nine-months and one-year, respectively. The company is a leading service provider in rubber solutions across North America and has a production capacity of more than 450 million pounds. The company maintains a solid customer relationship, which offers revenue stability. Moreover, the company added more than 30 clients from 2019, which is noteworthy. We have valued the stock using Price to Earnings based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Algoma Central Corp, Chorus Aviation Inc and Exchange Income Corp. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 16.14 on December 21, 2020.

1-Year BOS Daily Technical Chart (as on December 21, 2020). (Source: Refinitiv, Thomson Reuters)

Disclaimer

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