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

• Reduced operating expenses: In Q2 2021, the firm took proactive action to manage operating expenses. As a result, S&A expenses were successfully reduced to USD 22.9 million, or 33.1% of revenue, compared to USD 24.3 million, or 44.0% of sales in pcp. The reduction in S&A expenses as a percentage of revenues was attributed to decreased S&A expenses and a rise in sales. The net R&D expenses totaled USD 13.5 million, or 19.6% of sales, compared to USD 12.5 million, or 22.7% of sales, in pcp. 

Source: Company

• Healthy cash flows from operations: Cash flows provided by operating activities stood at USD 14.7 million in Q2 2021, compared to USD 7.1 million in pcp. The rise in cash from operations was mainly due to the positive net change in non-cash operating items for USD 11.6 million.

• Rise in bookings: Bookings increased by 8.9% to USD 79.3 million in Q2 2021, up from USD 72.9 million in the previous quarter. In the reporting quarter, the company's book-to-bill ratio was 1.15. The T&M product line's bookings grew by USD 1.7 million to USD 53.7 million, owing to increased fibre deployments to support broadband acceleration needs. Meanwhile, bookings for its SASS product line rose by USD 4.3 million to USD 25.3 million due to increased demand for the tracking solutions and some orders for the new Nova SensAI automatic monitoring troubleshooting solution.

Source: Company

• Ample liquidity: The company's cash and short-term investments totaled USD 24.3 million as of February 28, 2021, while working capital was USD 43.7 million. Compared to the previous comparable period, cash and short-term deposits rose by USD 7.8 million in Q2 2021. Furthermore, management expects that current funding would satisfy the company's liquidity and capital needs for the foreseeable future. 

Financial overview of Q2 2021 (in thousands of US dollars)

Source: Company

• In Q2 2021, the company witnessed an increase of 25.2% in total sales to USD 69.3 million, against USD 55.3 million in the previous corresponding period. Its T&M product line delivered a significant increase in sales by 36.8%, while sales of SASS product line slightly declined 2.1% compared to the same period last year.

• The company reported a lower negative EBIT of USD 1.8 million in Q2 2021 against a negative EBIT of USD 9.9 million in pcp. The improvement in EBIT was primarily due to lower S&A expenses, partially offset by amortization cost of USD 1.9 million V/s USD 1.6 million in pcp.

• Due to the above-stated reasons, the company’s net loss minimized to USD 2.4 million in the reported period, against a net loss of USD 9.0 million in Q2 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): EV to Sales

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

Stock recommendation

In Q2 2021, the firm continued to perform well, with a strong book-to-bill ratio of 1.15 and stable cash flows from operations of USD 14.7 million. In addition, the corporation took several constructive steps to control running costs, which is commendable. The strong bookings reflect an 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 their networks. Based on technical analysis, the stock has support at CAD 3.6 level. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 4.42 on May 13, 2021. We have considered Radcom Ltd, Sierra Wireless Inc, Quarterhill 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 or if the price closes below the support level.

1-Year Price Chart (as on May 13, 2021). Source: Refinitiv (Thomson Reuters)

Goldmoney Inc.

Goldmoney Inc. (TSX: XAU) offers the sale and purchase of precious metal through its online platform to its clients, while the group also provides delivery and storage of precious metals, coin retailing, lending etc. 

Key Updates:

• Growth in Asset Under Custody: The company’s asset under management has remained elevated in the recent few years, driven by company’s constant focus on providing seamless experience coupled with additional services like custody arrangement, dealing, managing and unrivalled research. The group has a client base across 150 countries and is holding more than CAD 2.5 billion of precious metal assets.                    

Source: Company Presentation

• Higher Fee Revenue: In the recent past, the company reported a constant increase in fee revenue, which has supported the company’s overall performance. Notably, during the first nine months of FY21, fee revenue stood at CAD 7.031 million, reflecting a whopping growth of 266% on y-o-y basis. Notably, the company reported consistent growth in its fee revenue in the last few quarters. The increase was supported by increase in client metal holdings, growth in precious metal fair value, coupled with the company’s policy of a minimum monthly fee and non-active/dormant account fees.

Quarterly Snapshot of Fee Revenue (Source: Company Presentation) 

Q3FY21 Financial Highlight:

• XAU declared its quarterly result, wherein the revenue stood at CAD 97.592 million, lower than CAD 108.161 million in the previous corresponding period (pcp). The Company’s precious metal trading operations witnessed a CAD 14.7 million decrease on y-o-y basis, partially offset by the CAD 4.1 million surge in the bullion and coins segments over the previous corresponding period (pcp).
• Gross profit stood at CAD 4.917 million, increased from CAD 4.368 million in pcp. The period was marked by lower cost of sales (CAD 94.191 million v/s CAD 105.692 million in pcp). An increase in fee revenue (CAD 2.904 million v/s CAD 0.718 million in Q3FY20) further supported the gross profit.
• Total operating expenses stood at CAD 3.653 million v/s CAD 6.703 million in pcp. The quarter witnessed marginally higher payroll expenses (CAD 1.578 million v/s CAD 1.519 million), higher advertising and promotion costs (CAD 0.430 million v/s CAD 0.415 million in pcp), partially supported by lower General and administrative expense (CAD 484.416 million v/s CAD 512.693 million in pcp).
• Net income was recorded at CAD 4.040 million, as compared to a net loss of CAD 2.958 million in Q3FY20.
• Cash and cash equivalents stood at CAD 18.384 million, while total assets stood at CAD 189.722 million.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: A downtrend in the gold prices might dampen the fee revenue, while the arrival of new players might increase competition, which may lead to loss of market share, loss of assets under custody etc.

Stock Recommendation: 

The long-term prospects of gold as an asset class remains extremely positive, driven by lower economic growth leading to lesser investment options. Moreover, the company has an impressive business model, wherein revenue is earned each time a client buys, sells, exchanges, takes delivery or stores precious metals through the company’s various operations. On the valuation front, the stock is available at an EV to EBITDA multiple of 16.1x on TTM basis, which is significantly lower than the industry (Technology) median of 31.6x. Based on technical analysis, the stock has a support at CAD 2.30 level. Considering the above rationale, we recommend a ‘Speculative Buy’ rating on the stock at the last closing price of CAD 2.87 on May 13, 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 May 13, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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