Knight Therapeutics Inc.

Knight Therapeutics Inc. (TSX: GUD) is a Canada-based specialty pharmaceutical company, which is engaged in acquiring or in-licensing and commercializing innovative pharmaceutical products for Canada and Latin America.

Key Updates:

• Acquisition of GBT to support future growth: With the acquisition of GBT, the group would seek in-licensing opportunities across America. The above acquisition is likely to enhance the company’s product presence and would diversify its product portfolio, which is a key positive. Moreover, GBT offers several innovative products and has its own proprietary R&D pipeline, which would likely to a add value proposition for the group.

• Lower Debt-component: The group has lowered its debt-component to CAD 12.172 million from FY19, which is impressive and reported total debt of CAD 43.407 million at the end of Q3FY20. We believe the above reduction would lead to lower interest costs in the coming quarters and would support the company’s profitability and cash flows.

Q3FY20 Financial Highlights:

• GUD announced its quarterly results, wherein the group posted tremendous growth in the revenue, driven by the positive impact from GBT acquisition, followed by the added traction from Impavido ^® and in-licensing of Trelstar^®. Revenue stood at CAD 45.239 million, as compared to CAD 4.030 million in the previous corresponding period (pcp).
• The quarter was marked by higher selling and marketing expense, considerable increase in general and administrative costs, and higher research and development expense, which has resulted to a higher operating loss of CAD 7.735 million, as compared to CAD 3.922 million in pcp.
• The company reported a gain financial instruments amounting CAD 12.873 million, as compared to a loss of CAD 4.883 million in pcp and a net gain on mandatory tender offer liability amounting CAD 10.502 million in pcp.
• Net income for the period stood at CAD 17.492 million, as compared to a loss of CAD 2.959 million in pcp.
• The group reported cash, cash equivalents and restricted cash balance of CAD 218.091 million, while total assets were recorded at CAD 1,013.963 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company is witnessing pressure from the rising operating costs, which is a reason for the concern. Continuation of the above trend would dampen the company’s overall performance. Moreover, the products of the company are subjected to regulatory approvals and the launch might be time-consuming.

Valuation Methodology (Illustrative): EV to Sales based

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

Stock Recommendation:

The group has an impressive portfolio with innovative offerings, which focuses on therapeutic segments, which is expected to support the company’s future business prospects. The company is focusing on Big Pharma’s non-core geographies and 2nd tier markets which would offer high business growth, with stable legal and regulatory systems, IP protection.  The stock of GUD closed above the short-term moving average of 10-days, 20-days and 20-days, respectively, indicating a bullish price trend. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like CRH Medical Corp, Hamilton Thorne Ltd etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 5.64 on February 10, 2021.

GUD Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Computer Modelling Group Ltd

Computer Modelling Group Ltd (TSX: CMG) is a Canada-based provider of reservoir simulation software for the oil and gas industry. Its capabilities include integrated analysis and optimization, black oil and unconventional simulation, reservoir and production system modelling, post-processor visualization, compositional simulation, thermal processes simulation, and fluid property characterization.

Key Highlights:

• Improved EBITDA and EBITDA margin: Despite a tepid annuity/maintenance revenue due to the consolidation activity in the oil and gas industry, which subsequently resulted into lower licensing demand, the group reported an improved EBITDA and EBITDA margin for 9MFY21, through impressive cost control strategies. Operating expenses for 9MFY21 stood at CAD 26.553 million, reflecting a 20% decline on y-o-y. EBITDA and EBITDA margin stood at CAD 27.209 million and 54%, respectively, as compared to CAD 27.188 million and 47%, respectively, a year ago.

Source: Company Reports

• Ample Liquidity: The company reported improved free cash flows of CAD 7.005 million in Q3FY21, higher than CAD 6.726 million in pcp. At the end of the quarter, the group reported a cash balance of CAD 39.176 million, reflecting a 7% y-o-y growth. Moreover, the group has access to approximately CAD 1.0 million under a line of credit. The management believes that it has sufficient capital resources to meet the operating and capital expenditure needs.

Source: Company Reports

• Dividend Announcement: The group reported a quarterly dividend of CAD 0.05 per Common Share, payable on March 15, 2020.
• Management Update: The company recently appointed Mr. John Billowits for the post of Director, effective from January 20, 2021.

Q3FY21 Financial Highlights:

• CMG announced its quarterly result, wherein the group posted revenue of CAD 16.038 million, as compared to CAD 19.275 million in the previous corresponding period (pcp).
• The group reported a higher operating profit of CAD 8.437 million, as compared to CAD 7.538 million in pcp. The increase was driven by lower sales, marketing and professional services (CAD 3.335 million versus CAD 4.744 million in pcp), lower research and development costs (CAD 3.092 million versus CAD 5.171 million in pcp) and lower general and administrative expense (CAD 1.174 million versus CAD 1.822 million in pcp).
• Net and total comprehensive income stood at CAD 5.875 million versus CAD 5.112 million in pcp, supported by improved operating profit, partially offset by higher finance costs (CAD 1.119 million versus CAD 0.762 million in Q3FY20).
• The company reported total current assets of CAD 55.621 million, while total assets were recorded at CAD 105.732 million.

Q3FY21 Income Statement Highlights (Source: Company Reports)

Risks: Due to the sluggish environment in the oil and gas industry, and a change in consumer spending, the company might continue to report lower annuity/maintenance license revenue in the coming quarters.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation:

The group witnessed an increased support requests, training activity as commercial customers are opting for “Energy Transition” models related to CO2 enhanced recovery, carbon sequestration and geothermal projects, which has shown growing interest from different organizations across the globe and is expected to support future growth as well. The group has a comparatively resilient business model and has reported an average annuity/maintenance income more than CAD 14 million in the recent quarters, though the clients are experiencing financial pressures. Also, the stock is gaining momentum as it closed above the immediate and short-term support levels of 5-day, 10-day, 20-day and 30-day SMAs, and more importantly the MACD is rising with the difference between 12-day and 26-day EMAs is positive and hovering above the 9-day SMA signal line, indicating a bullish technical indication in the stock.

We have valued the stock using Price to 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 Pason Systems Inc, Enghouse Systems Ltd etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 6.59 on February 10, 2021.

1-year Price Chart (as on February 10^th, 2020). Source: Refinitiv (Thomson Reuters)

Disclaimer

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