Enerflex Ltd.

Enerflex Ltd. (TSX: EFX) engineers, designs, develops, and delivers aftermarket support for equipment, systems and turnkey services, which are primarily used for natural gas from the wellhead to the pipeline. The Group’s wide in-house resources offer the capability to engineer, design, manufacture, construct, commission, and service hydrocarbon handling systems.

Key Highlights:

• Higher Recurring Revenue enhances income stability: Over the years, the company reported a consistent growth in recurring revenues, which is a key positive and indicates income stability. Notably, recurring revenue grew by ~8% on y-o-y basis since 2011. Moreover, the group has reported a better revenue mix, which resulted in an increased contribution from higher-margin recurring revenue product offerings. The above is favorable for the company’s margin improvement.
• Growth in cash flows: The company reported solid growth in its cash flow from operations, despite significantly lower net profit. The above was primarily driven by improved working capital management. Cash flow from operations stood at CAD 89.497 in H1FY21, as compared to CAD 74.260 million in pcp. Moreover, free cash flow stood at CAD 17.124 million in H1FY21, improved from a cash outflow of CAD 33.266 million in pcp.
• Revival in operations: The company showcased improved operations in Q2FY21 and reported total bookings at CAD 155 million, up from CAD 43 million in pcp, supported by improved demand from the Engineered Systems business. The management expects capital investments to improve from the industry players, supported by improved crude oil prices and subsequently increase in demand dynamics. The company also expects the demand for the BOOM and long-term lease segment to improve in the second half of FY21, which is a key positive.

Q2FY21 Financial Highlights:

• EFX announced its quarterly results, wherein the company posted revenue of CAD 204.507 million, declined from CAD 287.438 million in the previous corresponding period (pcp). The decline was primarily attributed to lower income from Engineered Systems (CAD 64.998 million v/s CAD 149.197 million in pcp).
• Gross margin stood at CAD 55.679 million, as compared to CAD 65.800 million in pcp. This was primarily attributed to lower income.
• The quarter was marked by lower selling and administrative expenses, a slide in the net finance costs and a higher income tax.
• Net earnings slide to CAD 4.291 million, as compared to CAD 7.415 million, a year ago.

Q2FY21 Income Statement Highlights (Source: Company Reports)

Risks: The company offers equipment services to the oil & gas industry; hence, lower demand offtake for crude may hit the company’s order book due to lower capital investments from its clients.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

In order to preserve liquidity, the company took prudent measures and significantly lowered its dividend distribution to CAD 3.587 million in H1FY21, as compared to CAD 20.625 million in pcp. The completion of multiple BOOM projects in the recent past, coupled with an extension of long-term contract extensions of ongoing projects, are expected to provide stable cash flows. We valued the stock using the Price to CF based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like Mullen Group Ltd, CES Energy Solutions Corp etc. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 7.83 on August 24, 2021.

*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 August 24, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Computer Modelling Group Ltd 

Computer Modelling Group Ltd. (TSX: CMG) is a Canada-based computer software technology company serving the oil and gas industry. The Company operates through the development and licensing of reservoir simulation software segment.

Key highlights

• Curtailed expenses: In Q1 2022, the company’s total operating expenses decreased by 19%, compared to the same period of the previous fiscal year, due to decline in both direct employee costs and other corporate costs. Additionally, the company witnessed lower revenue in the reported period but minimized expenses, which resulted in higher EBITDA as a % of total revenue, which increased to 46% V/s 41% in pcp.
• Consistently generating free cash flows: The resilience of the business helped the group in generating consistent free cash flows, which is applaudable. In Q1 2022, the company’s free cash flow stood at CAD 4.47 million against CAD 4.23 million in the previous corresponding period.
• Industry beating margins: Despite the hard time for the industry and economy, the management’s solid determination helped them leaping the industry median margins on many fronts in Q1 2022, which is a key positive. The chart below gives a glimpse of this.

• An income play: The company has a proven history of dividend payment, which establishes the fact that the company’s business is robust and has reported stable cash flows over the years. Recently, the company announced a quarterly dividend of CAD 0.05 per share, payable on September 7, 2021. Furthermore, at the last closing price, the stock was offering a yield of 4.662%, which is encouraging amid the lower interest rates.

Source: REFINITIV, Analysis by Kalkine Group

Financial overview of Q1 2022

Source: Company

• The company announced its Q1 2022 result, wherein it reported its top line at CAD 14.4 million, lower from CAD 16.6 million in the previous corresponding period (pcp). The decline was primarily due to a 15% y-o-y decline in the Software license revenue to CAD 12.4 million along with 7% decline in Professional services.
• The company witnessed solid operational efficiency and reported a 19% slide in operating expenses over the previous corresponding period, supported by the reduced SM&P services, R&D expenses, and general expenses. Operating profit stood at CAD 5.5 million v/s CAD 5.7 million in pcp.
• Net and total comprehensive income elevated to CAD 3.7 million v/s CAD 3.2 million in pcp, supported by lower operating expenses.
  

Risks associated with investment

Annuity/maintenance license payments, which are mostly dependent on the oil and gas sector, are the company's primary source of revenue. The firm suffered a drop in income from the aforementioned sector owing to decreased capital allocation from the oil and gas industry firms. If the current trend continues, the financials might fall.

Valuation Methodology (Illustrative): EV to EBITDA

Stock Recommendation: Despite the chaos caused by the COVID-19 epidemic, the firm produced a good set of figures, outperforming the industry margin on many fronts in Q1 2022, which is noteworthy. Furthermore, it maintained its free cash flow generation pace, with CAD 4.47 million. By altering its cost structure, the corporation also hopes to ensure the business's long-term viability. It has taken various cost reduction measures and is preserving its liquidity and maintaining a strong balance sheet to deal with this uncertain time. Furthermore, rising worldwide commodity prices are expected to promote future demand for the company's products from the oil and gas industry, which is a major plus. Meanwhile, CMG's stock offers a dividend yield of 4.662%, which is decent given the current interest rate environment. Therefore, based on the above rationales and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 4.29 on August 24, 2021. We have considered Mind Technology Inc, Solaris Oilfield Infrastructure 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 August 24, 2021). Source: REFINITIV, 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.