Andlauer Healthcare Group Inc. 

Andlauer Healthcare Group Inc. (TSX: AND) is a Canada-based company that provides healthcare supply chain services. The company offers a platform of customized third-party logistics (3PL) and transportation solutions for the healthcare sector.

Key highlights 

• Attractive Industry outlook: We believe that the company would reap benefits from the higher spending on healthcare logistics and transportation segment across North America, which is likely to stay above the GDP growth.

Source: Company

• Riding on acquisitions:The group recently announced the addition of TDS Logistics Ltd. and McAllister Courier Inc., two regionally focused temperature-controlled transportation businesses, for a price consideration of approximately CAD 15.9 million in cash. These acquisitions were funded from existing cash flow from operations. We believe these acquisitions would further support the group’s performance as the group is expanding and strengthening its platform. 

• A rise in cash flows from operations: Cash flows generated from operating activities in Q3 2020 stood at CAD 17.1 million compared to CAD 10.38 million in the previous corresponding period. The improvement in cash flows generated from operating activities relates principally to normal fluctuations in trade accounts receivable and trade accounts payable balances.

Source: Company 

Financial overview of Q3 2020

Source: Company 

• In Q3 2020 the company’s consolidated revenue increased by 7.0% to CAD 75.8 million, compared to CAD 70.8 million in Q3 2019. An improvement in revenue was due to the return of certain healthcare activities such as elective surgical procedures and the re-opening of clinics such as dental clinics, optometric clinics, and veterinary hospitals.
• Operating income in Q3 2020 stood at CAD 13.1 million, an increase of CAD 1.8 million, or 16.3%, compared with CAD 11.3 million in Q3 2019. This increase in operating income was mainly due to higher revenue.
• The company posted a net income of CAD 8.5 million in Q3 2020, compared to CAD 7.7 million in the previous corresponding period. Higher segment net income from both healthcare logistics operating segment and specialized transportation operating segment contributed to the increased profitability.

Risks associated with investment

Due to lower economic activity and a sluggish business scenario, the company might witness lower traction across the specialized transportation and healthcare logistic segment.  Furthermore, the company may experience an increase in absences related to the pandemic among its operational personnel, including warehouse associates, drivers, and operators, which could harm operations. 

Valuation Methodology (Illustrative): EV to Sales

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

Stock recommendation

The company is a leading and growing supply chain management company with a platform of customized third-party logistics and specialized transportation solutions for the healthcare sector. The group returned to a more normalized operating environment in Q3 2020 as the government lifted temporary restrictions related to COVID-19. In Q3 2020, revenue reflects the return of certain healthcare activities such as elective surgical procedures and the re-opening of certain human and animal health clinics. Recently the company acquired TDS Logistics Ltd. and McAllister Courier Inc. two regionally focused temperature-controlled transportation businesses. We believe these acquisitions will further support the group's performance in coming quarters. Therefore, based on the above rationale and valuation, we have given a "Speculative Buy" rating at the closing price of CAD 37.16 on January 6, 2021. We have considered Industry median multiple for the valuation purpose.

Technical Chat (as on January 06, 2021). Source: Refinitiv (Thomson Reuters)

Itafos

Itafos (TSXV: IFOS) is a pure-play phosphate and specialty fertilizer platform with an attractive portfolio of strategic businesses and projects located in crucial fertilizer markets, including North America, South America, and Africa.

Key highlights

• Solid phosphate market fundamentals with expected improvements in pricing:The fertilizer and agriculture sectors have generally been deemed essential worldwide. Therefore, most producers have not been forced to shut down operations due to the COVID-19 pandemic. North American demand was buoyant due to recovering crop prices and government support to the farming community through federal aid packages. The group forecasts utilization rates to increase back to 80-85% as commissioning of new capacity is delayed while demand continues to grow.

Source: Company

• EBITDA Optimization under process:The Company has initiated activities related to optimizing Conda’s EBITDA generation capability. It has entered into a third-party tolling agreement for a proprietary micronutrient enhanced dry product as an additional product in the new line of micronutrient enhanced dry products and completed an initial production run. The company also revised its guidance regarding adjusted EBITDA and increased lower end due to inflated pricing projections and mitigation efforts related to a sulfuric acid supply disruption at Conda.

Source: Company

• Disruption in sulfuric acid supply:The group’s Conda unit had experienced significant disruption in sulfuric acid supply from Rio Tinto’s Kennecott mine. Conda fulfils around 60% of its sulfuric acid requirements from a combination of volumes received from Rio Tinto’s Kennecott mine under a long-term supply agreement and volumes procured from other third-party suppliers. This disruption played a considerable role in bringing down the revenue numbers. The group is now taking measures to mitigate potentially adverse effects of the interruption in sulfuric acid supply to Conda from Rio Tinto’s Kennecott mine.

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the company's revenues were down by 42% to USD 47.6 million, as against USD 81.7 million in the previous corresponding period. The decrease in revenue was mainly because of lower production and sales volumes due to a disruption in sulfuric acid supply from its primary supplier at Conda unit.
• The company posted an operating loss of USD 6 million in Q3 2020 against USD 14.3 million in Q3 2019. The volume of operating loss came down due to low operating expenses as the company aggressively implemented corporate-wide cost savings and deferral of spending initiatives.
• The group's net loss in the reported quarter stood at USD 13.7 million, as against USD 20.7 million in the previous corresponding period mainly due to reasons stated above.

Risks associated with investment

The company is exposed to many risk factors that alone or cumulatively can affect its operations and financial health. Some of the risks are the supply of raw materials and demand for finished goods, realizations prices of finished products, exchange rates, inflation, interest rates, etc. The group's operations mainly depend on the supplies from Rio Tinto; any future disruption can play a massive role in the group's adverse financial performance.

Stock recommendation

The disruption in sulfuric acid supply played a considerable role in bringing down the revenue numbers. The group is now taking measures to mitigate the interruption's potentially adverse effects in sulfuric acid supply to Conda from Rio Tinto's Kennecott mine. We feel the step taken by the management is positive as it brings down their dependency from the single-player regarding the critical raw material. Furthermore, solid phosphate market fundamentals, along with expected improvements in pricing, is likely to help the group. The group has also initiated steps to boost its EBITDA through the additional product in the new line of micronutrient enhanced dry products. Further, the company intends to expand Conda mine life. On the valuation front, the stock is available at forward EV/Sales multiple of 1.4x against the peers mean of 2.59x. Hence, considering the aforesaid rationale, we have given a "Speculative Buy" rating in the stock at the closing price of CAD 0.29 on January 6, 2021.

Source: Refinitiv (Thomson Reuters)

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