EXFO Inc.

EXFO Inc. (TSX: EXF) provides technology solutions for wireless and wireline network operators across the telecom industry. The company serves the communications service providers (CSPs) and data centre, cloud and webscale operators with a field test along with many other services.

Key highlights 

• Acquired InOpticals Inc:Recently, the company acquired InOpticals Inc., a Taiwan-based company that offers ultra-high-speed test instruments for the laboratory and manufacturing markets. This acquisition has raised its T&M addressable market to more than USD 1 billion by expanding its high-end portfolio related to 400G and 800G technologies. Ultimately, it would allow them to strengthen their leadership position in the global fibre-optic test equipment market. It would also help them increase their footprint in the rapidly growing lab and manufacturing test segments. 

• Diversified customer base: The company sell its products to a diversified customer base in approximately 100 countries through direct sales force and channel partners, such as sales representatives and distributors. Most of the sales are denominated in US dollars, Euros and Canadian dollars. No customer accounted for more than 5% of its sales, and their top customer represented 4.3% of the group’s sales respectively in Q1 2021. We feel that this diversification provides reasonable protection against the concentration of sales and credit risk.

Source: Compnay 

• Healthy Capital Resources:As on November 30, 2020, cash and short-term investments totalled USD 16.5 million, working capital stood at USD 40.2 million. The management believes that its cash balances and short-term investments, combined with available revolving credit facilities of up to USD 61.4 million until May 2021 and USD 46.0 million thereafter, would be sufficient to meet liquidity and capital requirements for the foreseeable future.

Financial Overview of Q1 2021 (In Thousands of CAD)

Source:Company

• Sales in Q1 2021 stood at USD 71.5 million, registered nominal degrowth, compared to USD 73.6 million in the previous corresponding period. The company witnessed lower T&M sale, while a higher income was clocked from the SASS segment, increased 18.6% year-over-year.
• The company reported an EBIT of USD 5.7 million in Q1 2021 against USD 2.6 million in pcp. The rise in EBIT was primarily due to lower S&A expenses, partially offset by interest and other income of USD 1.87 million. 
• Due to the above-stated reasons, the company’s net earnings stood at USD 3.5 million in Q1 2021, against a net loss of USD 63K in Q1 2020.

Risks associated with investment

Further breakout of COVID-19 may affect the shipment and supply chain of the group. Also, as several companies are postponing their capital investments, the company might witness a slowdown in the bookings.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

Diversified customer base in approximately 100 countries through the direct sales force and channel partners augurs well to face any challenges. In FY2021, the Company would continue to strengthen its focus on high-growth drivers like fibre, 5G and cloud-native deployments while reducing investments in lower-growth areas. These initiatives would continue to benefit the group’s competitive position and enable profitable growth in future. Furthermore, the Company recently acquired a Taiwan based company that would strengthen its leadership position in the global fibre-optic test equipment market. It would also help them increase their footprint in the rapidly growing lab and manufacturing test segments. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 5.42 on March 8, 2021. We have considered Netscout Systems Inc, Evertz Technologies Ltd, Viavi Solutions Inc, etc. as the peer group for the comparison.

1-Year Price Chart (as on March 8, 2021). Source: Refinitiv (Thomson Reuters)

Spark Power Group Inc.

Spark Power Group Inc. (TSX: SPG) is an independent operator of end-to-end electrical contracting, and maintenance services, and energy sustainability solutions and caters to the industrial, commercial, utility, and renewable asset markets across North America.

Key Highlights:

• Better Client-servicing strategy: Recently, the company announced the expansion of its storm restoration services to support the increasing need for power recovery during outages caused by extreme weather. The above strategy is at par with the company’s growth strategy to serve the needs of utilities across North America. The company is focusing on leveraging its existing network to serve the utility customers promptly with its experienced linemen and equipment, which would lead to better customer servicing.
• Sequential Improvement denotes sectoral revival: The group reported higher revenue and net income of CAD 61.436 million and CAD 2.070 million, reflecting a solid growth of 32.58% and 68.02%, respectively, on Q-o-Q basis. The above improvement denotes a sectoral revival supported by improved demand from the renewable segment.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Recent Update: The company announced that it will refile its interim financial statements for the three and nine month periods ended September 30, 2020, as they are being amended and restated to reflect certain adjustments.

Q3FY20 Financial Highlights:

• SPG announced its quarterly results, wherein the company posted its Revenue of CAD 61.436 million, significantly higher than CAD 52.045 million in the previous corresponding period (pcp). The group reported a solid growth from its renewable segment, and reported an income of CAD 17.075 million, reported growth of 102.4% on y-o-y basis.

Revenue Bifurcation (Source: Company Reports)

• Gross profit stood slightly higher at CAD 17.909 million, from CAD 17.344 million in Q3FY19, due to a higher income, while a surge in cost of sales (CAD 43.527 million versus CAD 34.701 million in pcp) acted as a drag.
• Income from operations stood at CAD 3.742 million, declined from CAD 5.138 million in pcp, primarily attributable to an increase in selling, general and administrative costs (CAD 14.167 million versus CAD 12.206 million in pcp).
• Net income stood at CAD 2.070 million, lower than CAD 2.620 million in pcp, due to a lower income from operations coupled with an increase in finance expense (CAD 1.571 million versus CAD 1.282 million in pcp).

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company’s operations might be impacted due to a liquidity crunch on account of negative working capital management, higher finance costs and fluctuations in forex rates.

Stock Recommendation: Despite a slowdown in the overall economy, the group has managed to report higher cash from operations of CAD 4.465 million for 9MFY20 compared to CAD 3.190 million, a year ago, supported by higher net income and improved working capital management, which is a key positive. The group is witnessing strong growth from the renewable segment (particularly the wind segment) and has outpaced the industry growth, and we believe the momentum to continue supported by growing consciousness for carbon emission norms. On the flip side, the group reported EBITDA margin, operating margin and net margin in Q3FY20 at 18.5%, 5.9% and 3.4%, respectively, lower than the industry median of 44.4%, 21.7% and 4.9%, respectively. The stock soared ~36% and ~75% in the last three months and nine months, respectively, supported by revival within the sector. On the valuation front, the stock is available at an EV to Sales Multiple of 0.8x on NTM basis, as compared to the industry (Industrials) median of 1.8x. Hence considering the aforesaid facts, sectoral revival, recent price movement and valuations, we recommend a ‘Speculative Buy’ Rating on the stock the closing price of CAD 1.76 on March 08, 2021.

1-year Price Chart (as on March 08, 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.