GURU Organic Energy Corp

GURU Organic Energy Corp (TSX: GURU) is a wellness company, engaged in the business of manufacturing and marketing of organic energy drinks. Geographically, it derives a majority of revenue from Canada and also has a presence in the United States. 

Key Highlights

• Lucrative Macro Dynamics: The US energy drink segment is one of the growing industries within the non-alcoholic beverage category and is expected to grow at 8.1% CAGR to USD 19.4 billion by 2024 from USD 13.1 billion in 2019. As per the recent consumer trend, most of the customers are opting for healthier alternatives. Thus, the company’s product, with a strong distribution network, is expected to add higher sales volumes in the foreseeable future.

Source: Company

• Strong organic growth driven by an increase in Point-of-Sale: During Q1FY21, the group reported impressive revenue growth of 24% on y-o-y basis to CAD 6.6 million. The increase was aided by the rise in points of sales, which increased 34% y-o-y to 21,000. The performance has been supported by increasing brand presence as several banners ramping up marketing activities and increasing the company’s shelf space. Moreover, the company is planning to enhance its presence in the online segment, and is also focusing on the consumer acquisition, which is likely to drive the company’s customer base.

Source: Company

A Shift in Consumer Preference: As per the recent trend, the youth consumers are leaning towards energy drink product, as compared to other non-alcoholic beverages. Moreover, changing lifestyle and consumer’s interest in healthy food option is another key driver for the growing energy drink market. We believe the group is well poised to take advantage of the growing demand. Notably, the company reported a 13.6% market share within the Quebec region and is focusing on replicating the same cross the other North American geographies.

Financial Overview of Q1 2021

Source: Company

• The company announced its quarterly result, wherein it posted revenue of CAD 6.6 million, higher than CAD 5.3 million in the previous corresponding period (pcp). The increase was driven by improved traction from both Canada and United States.
• Gross profit surged to CAD 4.0 million, from CAD 3.5 million in Q1FY20. The increase was driven by higher revenue, partially offset by higher cost of goods sold (CAD 2.5 million v/s CAD 1.7 million in pcp).
• The quarter was marked by a higher selling, general and administrative expense (CAD 4.68 million v/s CAD 2.88 million in pcp) due to a significant surge in employee benefit expense.
• The group reported a net loss of CAD 0.6 million v/s a net income of CAD 0.4 million in pcp.

Risks associated with investment

The company is exposed to a variety of risks ranging from change in consumer taste and preferences, arrival of substitutes, intense competition, price risk, increase in raw material prices, supply chain risk. Other risk include forex risk as company has presence in the USA.

Stock recommendation

The company’s performance in the first quarter of 2021 was exceptionally well, with revenue nudged by 24% to record CAD 6.6 million. Further, sales growth in the U.S. also resumed with a 25% year-over-year increase in constant dollars in large part driven by online sales. This reflects the strength of the group’s brand as well as sustained demand for better-for-you energy drinks and plant-based products, despite the impact of pandemic-related restrictions in place during the quarter, including a curfew in Québec. The company has a strong financial position with access to more than CAD 30 million in cash and credit facilities, which seems to be sufficient to meet the working capital requirements. Therefore, considering the stellar performance of the company and risk associated, we believe the growth is likely to continue in the coming quarters. Based on the technical analysis, the stock has support at CAD 13.2 level. Hence, we recommend a ‘Speculative Buy’ rating on the stock of GURU at the closing price of CAD 16.35 on April 30, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock if the price closes below the support level.

Daily Price Chart (as on April 30, 2021) Source: Refinitiv (Thomson Reuters)

Computer Modelling Group Ltd

Computer Modelling Group Ltd. (TSX: CMG) is a Canada-based computer software technology company serving the oil and gas industry. The Company operates through the development and licensing of reservoir simulation software segment.

Key highlights

• Healthy margin profile: The company is enjoying a decent margin profile and maintaining a consistency in it. The EBITDA margin over the last three quarters stood above 40% and operating margin over the same period stood at above 30%. In Q3 2021, the company has posted spectacular margins, although operating margin and net margin declined slightly.

Source: Refinitiv (Thomson Reuters)

• Robust free cash flows: The resiliency of the business helped the group in posting spirited performance. The company has witnessed consistent free cash flows, which is applaudable. In Q3 2021 the company’s free cash flow increased by CAD 0.279 million to CAD 7.0 million, against CAD 6.7 million in the previous corresponding period.

Source: Company

• An income play: The company has a strong history of dividend payment, which establishes the fact that the company’s business is resilient and has reported stable cash flows over the years. On March 15, 2021, the company paid a quarterly dividend of CAD 0.05 per share. Moreover, at the last closing price, the stock was offering a dividend yield of 3.6%, which is decent looking at the current market dynamics.

Source: Refinitiv (Thomson Reuters)

Financial overview of Q3 2021

Source: Company

• The company announced its quarterly result, wherein it reported its top line at CAD 16.0 million, lower than CAD 19.2 million in the previous corresponding period (pcp). The decline was primarily due to a 20% y-o-y decline from the Software license revenue to CAD 14.1 million. The above segment contributes 88% of the total revenue.

• The company witnessed solid operational efficiency and reported a 20% slide in operating expenses over the previous corresponding period, supported by CAD 1.7 million of benefits received from CEWS and CERS, coupled with the reduction of employee compensations from July 2020. Operating profit surged to CAD 8.4 million v/s CAD 7.5 million in pcp.

• Net and total comprehensive income stood at CAD 5.8 million v/s CAD 5.1 million in pcp, supported by improved operating profit, partially offset by higher finance costs (CAD 1.1 million v/s CAD 0.7 million in Q3FY20).

• Cash balance stood at CAD 39.1 million, while total assets were recorded at CAD 105.7 million.

Risks associated with investment

The company generates majority of the revenue from Annuity/maintenance licenses fees, which primarily dependent on the oil and gas industry. Due to the erosion in the international crude oil prices during a major part of 2020, the group saw a slide in income from the above segment due to lower capital allocation from the oil and gas industry companies. Continuation of the above trend might lead to lower income.

Valuation Methodology (Illustrative): EV to EBITDA 

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

Stock recommendation

The company is focused on ensuring the resilience of its business by adjusting its cost structure. It has taken various cost reduction measures and is preserving the liquidity and maintaining a strong balance sheet to deal with this uncertain time. Improved international commodity prices are likely to support the upcoming demand for the company’s offerings from the oil and gas industry, which is a key positive. Furthermore, the stock of CMG carries a decent dividend yield of 3.65%amid low interest rate environment. Based on technical analysis, the stock has support at CAD 4.4 level. Therefore, based on the above rationale and valuation, we suggest a “Speculative Buy” recommendation at the closing price of CAD 5.48 on April 30, 2021.

*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 April 30, 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.