EXFO Inc.

EXFO Inc. (TSX: EXF) provides technology solutions for wireless and wireline network operators within the telecom industry. The company provides communications service providers (CSPs) and data center, cloud and webscale operators with a field test, service assurance and analytics solutions, maintenance, and management of mobile networks.

Key Updates:

• Reduction in total debt amidst challenging industry scenario: The company succeeded in reducing the total debt to USD 23.5 million in Q2FY21, reflecting a decline of 20.3% and 50.5% from Q1FY21 and Q4FY20, respectively. Lower debt is a healthy sign for the company as it enhances the overall financial flexibility of the firm. Moreover, it leads to lower finance costs, and provides supports to the profitability and margins. 

• Balanced Portfolio: The company’s operations are not dependent on specific customers or any particular region, which reduced the company’s risk profile. Notably, in Q2FY21, the company derives only 14.3% of sales from its top three clients. Moreover, 48% of the company’s business comes from America’s segment, while the EMEA and APAC contribute 38% and 14%, respectively.

Source: Company Presentation

Q2FY21 Financial Highlights:

• EXF announced its quarterly results, wherein the group posted sales of USD 69.254 million, which increased from USD 55.313 million in the previous corresponding period (pcp).
• Moreover, bookings improved by 8.9% on y-o-y to USD 79.3 million in the quarter, from USD 72 .9 million in Q2FY20.
• Adjusted EBITDA stood at USD 3.407 million, improved drastically from a loss of USD 4.916 million in pcp due to higher depreciation and amortization costs (USD 4.236 million v/s USD 3.973 million in pcp). Adjusted EBITDA margin improved to 4.9% from a negative 8.9% in Q2FY20.
• The corporation reported a net loss of USD 2.439 million, which improved significantly from a loss of USD 9.021 million in Q2FY20.
• EXF posted a cash balance of USD 23.868 million, while total assets were recorded at USD 296.630 million.

FY20 Income Statement Highlights (Source: Company Report)x 

Risks: A further breakout of COVID-19 might result in lower order book, which might impact the company’s overall income. 

Valuation Methodology: Price to Cash Flow Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The group reported an improved cash flow from operation during the first half of FY21 at USD 16.739 million, significantly higher from USD 0.665 million in the previous year, supported by positive net earnings coupled with improved working capital management. Going forward, the company’s operations would be benefitted from increased market demand, driven by catch-up spending and early deployments of 5G, cloud-based networks, as communications service providers get a better handle on transforming the networks during the COVID 19 pandemic. We have valued the stock using P/CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like, Anritsu Corp, Viavi Solutions Inc and Elisa Oyj etc. Hence, considering the above rationale, we recommend a ‘Speculative Buy’ rating on the stock of EXF at the closing market price of CAD 4.95 on April 12, 2021.

One-year Price Chart (as on April 12, 2021). Source: Refinitiv (Thomson Reuters)

Kelso Technologies Inc.

Kelso Technologies Inc. (TSX: KLS) is a railway equipment supplier that produces and sells tank car service equipment used for the safe loading, unloading, and containment of hazardous materials during transport. 

Key Highlights:

• Stock hovering above Long-term support levels: Despite a ~14% correction during the last one month, the KLS stock has closed above the long-term support levels of 200-days and 100-days simple moving average, respectively. Notably, in the recent past, the stock of KLS stock received huge traction from the investors and it gained ~58% and ~48% in the last six months and one-year, respectively, supported by a gradual recovery in the industry demand.

Source: Refinitiv (Thomson Reuters)

• Positive Macro Scenario: Despite a tepid performance in FY20 due to lower demand from the OEM rail tank car producers, the long-term outlook of the industry remains bright. As per the recent study, in FY21, demand from OEM producers will be ~8,800 for new tank cars, while new tank car demand is expected to grow to 14,800 tank cars in 2022 and 19,100 tank cars in 2023. The above growth is underpinned by elevated new build and retrofit activity coupled with a growing number of qualified Kelso products. Moreover, growth from the rail operations is likely to drive the company’s sales volume in the coming days.

FY20 Financial Highlights:

• KLS announced its full-year result, wherein the company posted revenue of USD 11.149 million v/s USD 20.55 million in the previous financial year. The decline was primarily attributable to demand destruction scenario within the rail tank car industry due to COVID 19 pandemic.
• Total expenses stood lower at USD 5.768 million, from USD 6.087 million in FY19, primarily due to lower office and the administrative expense (USD 2.07 million v/s USD 2.22 million in FY19) and a significant slide in management compensation (USD 0.67 million v/s USD 1.037 million in FY19). However, higher research expense (USD 1.39 million v/s USD 1.13 million) and higher marketing costs (USD 0.36 million v/s USD 0.29 million) remained a drag.
• The group reported a loss before taxes at USD 1.058 million v/s, a profit of USD 3.43 million in FY19, primarily due to a lower income.
• The company reported a net loss of USD 1.31 million, as compared to a net profit of USD 3.33 million in FY19.

FY19 Income Statement Highlights (Source: Company Report)

Risks: The company’s operations would hinder by the imposition of further lockdown restrictions by the Provincial Governments, which might led to a pause in the order book from the OEM rail tank car producers.

Stock Recommendation:

Despite a slowdown in orders from OEM rail tank car producers, the company received consistent orders from other segments such as retrofit and repair business, which is a key positive. Apart from rail tank car equipment manufacture, the company is making its mark across new avenues, which is a key positive and would reduce the dependence on one segment. The transportation industry seeks improved equipment performance, environmental safeguards and more efficient use of time, and the company is highly poised to meet the growing needs of innovative products within the sector. However, the company’s operation is cyclical in nature, and the downtrend could last for 3 to 5 years as inventories of new cars are worked into the fleet.                                      

Source: Company Report

On the valuation front, the stock is available at an EV to Sales multiples of 4x on the trailing twelve months (TTM) basis, as compared to the industry (industrial) median of 112.8x. Hence, considering the above rationale, we give a ‘Speculative Buy’ rating on the stock of KLS at the closing price of CAD 1.06 on April 12, 2021.

One-Year Price Chart (as on April 12, 2021). Source: Refinitiv (Thomson Reuters)

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.