Computer Modelling Group Ltd.

Computer Modelling Group Ltd (TSX: CMG) is a Canada-based provider of reservoir simulation software for the oil and gas industry. Its capabilities include integrated analysis and optimization, black oil and unconventional simulation, reservoir and production system modelling, post-processor visualization, compositional simulation, thermal processes simulation, and fluid property characterization.

Key Highlights:

• Improved Cash from Operations: The company reported solid growth in the cash from operations for 9MFY21 at CAD 12.010 million, higher than CAD 8.099 million a year ago.         

Cash Flow Highlights (Source: Company Report)

• Operational Efficiency Cushioning the Profitability: As a major part of the revenue is dependent on the oil and gas industry, a decline in the international oil and gas prices would lead to an adjustment in the capital budgeting of these clients, which subsequently acts as a drag for the company’s operations. However, the company retained its profitability through several cost-efficiency strategies, which is encouraging considering the recent scenario. During 9MFY21, the company reported a higher-double-digit reduction in the operating costs, as compared to the same period of the preceding financial year.

Source: Company Report

Source: Company Report 

Q3FY21 Financial Highlights:

• CMG announced its quarterly result, wherein the company reported its top line at CAD 16.038 million, lower from CAD 19.275 million in the previous corresponding period (pcp). The decline was primarily due to a ~20% y-o-y decline from the Software license revenue to CAD 14.137 million. The above segment contributes ~88% of the total revenue.

Revenue Bifurcation (Source: Company Report)

• The company witnessed solid operational efficiency and reported a ~20% slide in operating expenses over the previous corresponding period, supported by CAD 1.7 million of benefits received from CEWS and CERS, coupled with the reduction of employee compensations from July 2020. Operating profit surged to CAD 8.437 million v/s CAD 7.538 million in pcp.
• Net and total comprehensive income stood at CAD 5.875 million v/s CAD 5.112 million in pcp, supported by improved operating profit, partially offset by higher finance costs (CAD 1.119 million v/s CAD 0.762 million in Q3FY20).
• The company reported a cash balance of CAD 39.176 million, while total assets were recorded at CAD 105.732 million.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: The company reports its major revenue from Annuity/maintenance licenses fees, which primarily dependent on the oil and gas industry. Due to the erosion in the international crude oil prices during the major part of 2020, the group saw a slide in income from the above segment due to lower capital allocation from the oil and gas industry companies. Continuation of the above trend might lead to lower income.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

The stock of CMG carries a decent dividend yield of ~3.4%, which is decent considering the current interest rates scenario. Improved international commodity prices are likely to support the upcoming demand for the company’s offerings from the oil and gas industry, which is a key positive. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have industry (Technology) median on NTM basis. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 5.90 on March 19, 2021.

One-Year Price Chart (as on March 19, 2021). Source: Refinitiv (Thomson Reuters)

Crown Capital Partners Inc.

Crown Capital Partners Inc. (TSX: CRWN) provides investment management services and is a specialty finance company which offers capital to middle-market companies. The firm offers long-term financing and special situation financing. Crown Capital mainly operates through two segments namely Specialty fiancé and Network services.

Key Highlights:

• Capital Addition across Distributed Power business: A significant portion of the company’s operation comes from power generation assets that provide electricity under long-term contracts to mid-to large-scale electricity users. Currently, the company has deployed its capital across three new operating partners and construction of multiple projects, which would lead to the total number of operating assets to eleven. Due to the nature of the business, the company is expected to deliver stable cash flows and income in the coming quarters.
• Increased Liquidity: The company reported an increase in the credit facilities at CAD 62.911 million in FY20 v/s CAD 38.406 million in FY19. We believe the increase in the credit facilities is likely to support the company’s overall liquidity while the group would likely meet its working capital and capital investments requirements.

FY20 Financial Highlights:

• CRWN announced its full-year result, wherein the company posted total revenue of CAD 44.824 million, significantly higher from CAD 25.207 million in FY19. The increase was driven by strong growth from network services revenue (CAD 12.116 million v/s CAD 4.002 million in FY19) due to the acquisitions of WireIE Holdings International and Galaxy Broadband Communications coupled with a net realized gain from investments, amounting to CAD 0.594 million, as compared to a loss of CAD 9.866 million in FY19.
• The period was marked by an increase in salaries and benefits (CAD 5.393 million v/s CAD 4.550 million in FY19), significantly higher cost of network services revenue (CAD 5.790 million v/s CAD 1.420 million in FY19) and a higher finance cost (CAD 6.352 million v/s CAD 3.933 million in FY19).
• Net loss widened to CAD 13.295 million from a loss of CAD 0.209 million in FY19. The decline was due to a loss from non-controlling interest amounting to CAD 13.498 million.
• Cash and cash equivalents were recorded at CAD 19.150 million, while total assets were recorded at CAD 322.479 million.

Income Statement Highlight- FY20

(Source: Company Report)

Risks: The group’s operations might be impacted due to adverse economic conditions, interest rates volatility, etc.

Stock Recommendation:

The group reported a stable operation during the pandemic. The majority of the segments remain largely unaffected despite the pandemic, while a small part of the portfolio remained under pressure due to the financial restructurings. The recent acquisition of Galaxy Broadband Communications in Q3FY20 would expand the company’s presence across the Network Services platform and would provide connectivity to remote and underserviced enterprise customers across Canada, which is a key positive. Notably, the company’s PenEquity witnessed a deterioration in the value of specific development properties, due to the impact that COVID-19. On the valuation front, the stock is available at forward Price to Book Value multiple of 0.5x, which is significantly lower than the industry (Investment Banking & Investment Services) median of 2.0x. Hence, considering the above rationale, we suggest a ‘Speculative Buy’ recommendation on the stock at the closing price of CAD 5.25 on March 19, 2021.

One-year Price Chart (as on March 19, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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