Diversified Royalty Corp

Diversified Royalty Corp (TSX: DIV) is a multi-royalty company engaged in the business of acquiring royalties from multi-location businesses and franchisors in North America. As a part of the investment strategy, the firm always purchases trademarks of the companies it is going to acquire.

Key highlights 

• An Income play:Despite this challenging environment, the company maintained its dividend distribution; this reflects its financial strength. Recently, the company announced a monthly dividend of CAD 0.01667per share, which equates to CAD 0.20 per common share on an annualized basis. Moreover, at the last closing price, the stock was offering a hefty dividend yield of ~8.0%, which is lucrative, considering the current interest rate environment.

• Increased cash from operating activities: On the back of higher revenues and controlled expenditures, the company clocked healthy growth in its cash flow from operations in Q1 2022, which stood at CAD 6.0 million against CAD 4.1 million in the previous corresponding period, while the distributable cash also increased to CAD 5.8 million from CAD 5.4 million in pcp.

Source: Company

• Industry beating margins: The management’s solid determination helped the group in leaping 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 (Expressed in thousands of CAD)

Source: Company 

• For Q1 2021, DIV generated CAD 7.6 million of revenue compared to CAD 7.2 million in the previous corresponding period. The rise in revenue was mainly due to acquisition of the Oxford Rights in February 2020 and higher royalty income from Sutton.
• The company posted income from operations at CAD 6.9 million, against a loss of CAD 13.5 million in Q1 2020. The company reported lower operating expenses mainly due to no Impairment loss in the reported period.
• On the back of higher revenue and increased income from operations, the company posted a net income of CAD 4.1 million, against a loss of CAD 11.7 million in the previous corresponding period.
  

Risks associated with investment

The company derives its revenue in the form of royalties from different businesses. The recent restrictions imposed on account of the pandemic have caused a tremendous impact on many segments. Continued pain in the sectors might hinder the group’s performance. 

Valuation Methodology (Illustrative): Price to Cash Flow 

Stock recommendation

The increased limitations implemented by various governments in recent months to tackle the rising number of COVID-19 cases is projected to result in some softening. However, with vaccines beginning around the country, the business is hopeful that when government limitations are eased, and the economy stabilizes, there would be a considerable rebound among its Royalty Partners. Additionally, it plans to boost cash flow per share by completing accretive royalty purchases and growing acquired royalties. Furthermore, the stock carries an attractive dividend yield of ~8.0%, which is lucrative, given the current interest rate environment. In Q1 2021, the firm also outperformed the industry median margins on a number of fronts, demonstrating its competitive edge. Based on technical analysis, the stock has support at CAD 2.05 level. Therefore, based on the above rationale and valuation, we have given a "Speculative Buy" rating at the closing price of CAD 2.51 on June 08, 2021.

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

One-Year Technical Price Chart (as on June 08, 2021). Analysis by Kalkine Group

Kidoz Inc

Kidoz Inc (TSXV: KIDZ) is mainly engaged in creating consumer mobile software products and games. The firm is a kid-tech software developer and owner of the KIDOZ content discovery network. It emphasizes the development and marketing of a platform of interactive games for families and children. 

Key Highlights 

• Kidoz Launches on AGORACOM Platform:  On the AGORACOM platform, the company launched a 12-month online marketing campaign to engage new and existing investors in its business plan. It also hopes to get considerable exposure as a result of its position on the AGORACOM Digital Network, which recently topped 600 million page views and has outperformed industry engagement metrics by over 400% in its work with over 350 public firms.

• Focused on development and expansion: The company is working on technologies that would allow it to access a larger range of inventories app types so that it can expand its capabilities and market share. While the company's primary emphasis is on the creation and extension of the KIDOZ Safe Ad Network, it is also looking at ways to leverage its technology to grow into other areas, either through new links to the larger mobile advertising industry or through synergistic M&A.

• Uprising demand: The firm had record demand from its advertisers in its operating regions in Q1 2021. There is no sign that this growth would diminish in the near future, which is a major positive. In the past, the firm has only generated 12% of its annual revenues in the first quarter, so if this pattern continues, the firm would have an amazing year.
  

Financial overview of Q1 2021 (Expressed in United States Dollars)

Source: Company 

• In Q1 2021, the company reported higher revenue, which increased 58% to USD 1.55 million, against USD 0.98 million in the previous corresponding period. The company witnessed a healthy performance from Ad tech advertising, partially offset by content revenue.
• On the back of higher revenue, the group posted an increased gross profit of USD 0.68 million against USD 0.44 million in pcp.
• Higher G&A expenses, selling and marketing expenses, and software development cost increased the company’s total operating cost, which stood at USD 0.99 million in Q1 2021 V/s USD 0.83 million in pcp.
• The company reported a lower net loss in Q1 2021, at USD 0.34 million, compared to a loss of USD 0.40 million in pcp.
  

Risks associated with investment

The company operates worldwide, which generates a risk that the exchange rate fluctuations may adversely impact cash flows. Continued reduction in OEM sales of Kid’s tablets could also weigh on the group’s content segment revenue. Further, the business model is also exposed to regulatory risk such as licenses. 

Stock recommendation

The firm saw a solid rise of 58% in total revenue in the reported quarter, mostly due to the high demand for kid-safe advertising produced by implementing stringent legislation throughout the world and sees no sign that this development would diminish in the near future. Many strong macros, consumer and industry trends support Kidoz's mobile product approach of pure contextual targeting, devoid of any invasive data monitoring. Adopted solutions contribute to the company's rapid system expansion and solid financial performance. Based on technical analysis, the stock has support at CAD 0.61 level. On the valuation front, the stock is available at a forward EV/EBITDA multiple of 23.8x against the industry mean of 50.3x. Hence, considering the aforesaid rationale, we recommend a "Speculative Buy" rating in the stock at the closing price of CAD 0.76 on June 08, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock if the price closes below the support level.

One-Year Price Chart (as on June 08, 2021). Source: 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.