Knight Therapeutics Inc

Knight Therapeutics Inc (TSX: GUD) is a specialty and generic drug manufacturing company. Its principal business activity is focused on developing, acquiring, in-licensing, out-licensing, marketing, and distributing innovative pharmaceutical products, consumer health products, and medical devices in Canada and select international markets.

Key highlights

• Robust jump in Adjusted EBITDA: In the reported quarter, the company's adjusted EBITDA rose by CAD 1.7 million, or 23% and by CAD 3.0 million, or 47%, on a constant currency basis, compared to Q2 2020. The increase in adjusted EBITDA was driven by a CAD 5.6 million increase in gross profit due to higher revenues, offset by a CAD 1.3 million increase in operating expenses due to the cost of extending stock options and a reduction in the adjustments of reconciling items from operating income to adjusted EBITDA.
• Rising cash inflow from operations: The company's cash inflow from operations was CAD 12.4 million, up CAD 4.3 million, or 54%, over the previous year. This rise was fueled by a CAD 1.5 million drop in non-cash working capital and other factors as a consequence of controls implemented in 2020 on inventory management and receivables collection, as well as CAD 10.8 million in net income generated adjusted for several reconciling factors.
• Reduced debts burden:The company was able to reduce its debt load, which is commendable. Bank loans amounted at CAD 35.1 million on March 31, 2021, down CAD 16.6 million or 32% from the previous period, owing mostly to CAD 14.9 million in loan repayments and a further CAD 2.3 million due to foreign exchange revaluation.
• Developing branded generic products:Through the GBT acquisition, the Company is concentrating on developing branded generics for Argentina and other LATAM markets. The Company is focusing on expanding the geographic reach of currently developed branded generics. Besides, it is working on optimizing development efforts and capabilities to access more enormous opportunities for LATAM.
  

Financial overview of Q2 2021 (In thousands of CAD)

Source: Company

• In Q2 2021, the company’s revenues increased to CAD 65.7 million, against CAD 53.2 million in the previous corresponding period.  The increase in revenue was mainly due to higher sales from new product launches.
• Primarily on the back of higher revenues and lower cost of goods sold, the company clocked gross income of CAD 28.8 million against CAD 22.2 million in pcp.
• The company witnessed lower operating expenses, which helped the company to maximize its income before income tax that stood at CAD 26.5 million against CAD 14.6 million in pcp.
• The company recorded income tax recovery and its net income for the reported period stood at CAD 29.0 million against CAD 15.5 million in the previous corresponding period.
  

Risks associated with investment

The Company's products are subjected to regulatory approvals and might be time-consuming, which might further impact the product pipeline. Furthermore, after the GBT transaction, the Company is exposed to additional risks related to investing and operating in international locations, including emerging markets. Operating in such markets carry substantial inherent financial, legal and political risks. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

Despite the continued problems created by the pandemic, the business generated record quarterly earnings in Q2 2021. The company has performed well on several fronts in the last six months, with its business development team closing the Exelon® transaction and already working on its integration, which is a significant positive. In addition, the company is focusing on creating branded generics for Argentina and other LATAM countries. In addition, the company is concentrating on increasing the regional reach of branded generics that have already been produced. Furthermore, the firm maintained a high rate of cash flow generation while reducing debt, which is commendable. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating at the closing price of CAD 5.40 on September 01, 2021. We have considered Greenbrook TMS Inc, Medexus Pharmaceuticals Inc, Hamilton Thorne Ltd, 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 September 01, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Ag Growth International Inc

Ag Growth International Inc (TSX: AFN) is a leading provider of equipment solutions for agriculture bulk commodities including portable and stationary grain handling, storage and conditioning equipment, belt conveyors, grain storage bins, grain handling accessories, grain aeration equipment and grain drying systems.

Key highlights

• Improving macros would support future growth: Crop yields, prices, and trade flow are all increasing, indicating that global macroeconomic conditions are strengthening. While the company's demand drivers are more closely linked to crop numbers, trade procedures, and consumption levels, the current agricultural pricing scenario provides a good tailwind for its markets. Favorable farm-level conditions in North America would continue to drive demand for its products.

• Resilient performance from each segment and geography: The company’s business has shown some resilient stuff from its all segment and geographies, where it witnessed healthy growth in its sales. Its farm business clocked a growth of 16% to CAD 303.1 million on YTD basis, while other segments has also shown the positive attitude. Although the Canadian region’s sale depressed by 1%, but the U.S and international markets clocked healthy growth.

Source: Company

• Delivering sustainable growth: In Q2 2021, the Company continued its momentum, with sales increasing by 15.4% to CAD 301.6 million on a year-over-year basis, and Adjusted EBITDA increasing by 4.8% to CAD 46.2 million from CAD 44.1 million in the previous corresponding quarter. The Company’s continuous growth in revenue and Adjusted EBITDA is supported by healthy demand and a substantial backlog.

• Firm order backlog: Order intake continues to be high, with excellent backlogs indicating that sales are on pace. This demonstrates the company's newfound resilience in terms of its business strategy. The company's agricultural backlog has risen by 90% year over year. Customers' emphasis has resulted in a surge in demand for farm equipment. As on June 30, 2021, the total commercial segment's backlog was up 59% year over year, resulting in a 69% increase in overall backlog.
  

Financial overview of Q2 2021

Source: Company

• The Company posted an increase in net sales of 15% to CAD 302.6 million, compared to CAD 257.9 million in Q2 2020, mainly due to healthy sales performance from all segments, primarily farm segment and commercial platform in all the geographies, partially offset by the Canada region.
• The Company posted a higher gross profit at CAD 75.2 million in Q2 2021, compared to CAD 67.3 million in pcp, on the back of higher revenue.
• Profit before income tax stood at CAD 16.1 million, against CAD 18.3 million in pcp.
• The Company recorded a net income of CAD 14.2 million in Q2 2021, compared to CAD 14.4 million in the previous corresponding period, due to the above-stated reason.
  

Risks associated with investment

In the near-term, the rise of steel, component, packaging, and freight costs would pressure the gross margin of the segment. While cost increases can be passed onto customers in many instances, the meteoric rise in steel costs would impact the company’s Q3 2021 margins.

Valuation Methodology (Illustrative): EV to EVIBTDA

Stock recommendation

The company's outstanding second-quarter results continue to demonstrate the benefits of its recent expansion and diversification. Despite severe supply chain challenges throughout the world, the company had a good quarter because to broad-based growth and market share increases across Brazil, India, the United States Farm, its Technology division, and the Food platform. We believe the company is well positioned for a good end to 2021 and moving beyond, with record backlogs. Furthermore, despite the challenges of rising steel price, component, packaging, and freight costs, the company expects strong full-year trade sales and adjusted EBITDA above the FY 2020 levels. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 29.69 on September 01, 2021. We have considered Superior Plus Corp, Savaria Corp, Shawcor Ltd, etc., as the peer group for 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 September 01, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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