Gear Energy Ltd

Gear Energy Ltd (TSX: GXE) is engaged in the business of acquiring, developing, and holding interests in petroleum and natural gas properties and assets. Its oil-focused operations are in three core areas: Lloydminster Heavy Oil, Central Alberta Light/Medium Oil, and Southeast Saskatchewan Light Oil.

Key highlights 

• Significant optimism for commodity demand in 2021: COVID-19 vaccine rollouts ushered in a new age of hope for the global economy and a resurgent commodity demand in 2021. All of this has resulted in a first-quarter rise in West Texas Intermediate (WTI) oil prices. WTI began the year at USD 48 per barrel and averaged USD 58 per barrel in the first quarter. When compared to a year ago, in April 2020, when WTI hit a historic low of minus USD 37 per barrel, this scenario seems bright. The company would restart capital expenditure in FY 2021 through the drilling of new wells and the extension of waterfloods, while continuing to repay debt, which is positive statement.
  

• Lowering operating cost: Accomplished by reducing debt balances, utilizing a low compensation structure and focusing production operations on low cost, high productivity horizontal wells, the company expects 31% reduction in estimated 2021 total costs as a percentage of revenue (Compared to 2014). Apart from the anomaly that was in 2020, it has shown consistent progress in continuing to lower costs.

Source: Company 

• Increase in funds from operations: Funds from operations increased from CAD 6.3 million or CAD 10.20 per boe in the first quarter of 2020 to CAD 8.3 million or CAD 17.19 per boe in the first quarter of 2021. The increases in funds from operations are the result of increased revenues due to higher realized commodity prices, and decreased operating, transportation and general and administrative costs.

Financial overview of Q1 2021

Source: Company 

• In Q1 2021, the company reported total revenue of CAD 16.9 million against CAD 37.7 million in the previous corresponding quarter. The fall in revenue was primarily due to realized and unrealized loss on risk management contracts, partially offset by higher realized commodity prices.
• Total expenses in the reported period stood at CAD 20.4 million against CAD 124.7 million in pcp. The expenses were higher in pcp mainly due to impairment.
• On the back of above discussed factor, the company generated a net loss of CAD 3.5 million in Q1 2021, compared to a net loss of CAD 110.2 million for the same period in 2020.
  

Risks associated with investment

The company is exposed to a variety of risks ranging from Commodity price risk, Currency Transition risk, and Interest rate risk. Further, the company is exposed to the next wave of covid-19 as it can hamper production. Also, production is exposed to weather condition. 

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

Greater commodity prices and increased production are expected to boost the company’s fund from operations in fiscal 2021. Furthermore, by deleveraging the balance sheet, a higher commodity price combined with strong cost management efficiency would also improve the company's financial health. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 0.66 on July 28, 2021. We have considered Birchcliff Energy Ltd, InPlay Oil Corp, Touchstone Exploration 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.

Technical Analysis Summary

One-Year Technical Price Chart (as on July 28, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Ceapro Inc

Ceapro Inc (TSXV: CZO) is engaged in the development and application of proprietary extraction technology to produce extracts and active ingredients from oats and other renewable plant sources. Its operating segments are the Active ingredient product technology industry and the Cosmeceutical industry.

Key highlights 

• Registering growth in revenue and margins: Despite the turbulent year of 2020, the Company maintained its momentum and had an impressive result in terms of yearly sales and gross margins. Furthermore, the firm has continued to see this winning pattern, demonstrating its determination. Revenue increased by 10% in the first quarter of 2021 compared to the first quarter of 2020.

Source: Company 

• Positive outlook for cosmeceutical base business: We expect the company’s cosmeceuticals-based business to continue to grow and provide positive cash flows to support the expansion to a new business model. It is repositioning itself from a contract manufacturer/commodity company to a high-value life science/biopharmaceutical company involved in nutraceuticals and pharmaceuticals. Moreover, it has all the key components for success, including a solid foundation, a highly competent team, a healthy balance sheet, and a strong technology and product portfolio with the potential of getting into very large markets.

• Value driving lead products: The company has established base business with multiple growth opportunities and leveraging two value-driving products and enabling technologies, which supports near-term and future growth.

Source: Company 

Financial overview of Q1 2021

Source: Company 

• Total revenue in Q1 2021, increased by 10% to CAD 4.7 million compared to CAD 4.2 million in the previous corresponding period. The increase was primarily driven by higher beta glucan sales, partially offset by a lower U.S. dollar relative to the Canadian dollar.
• Gross margin dropped to CAD 2.2 million in the reported period against CAD 2.3 million, mainly due to higher cost of goods sold, which stood at 52% V/s 44% in pcp.
• Income from operations stood at CAD 0.62 million against CAD 0.85 million in Q1 2021, primarily due to increased R&D expense.
• Net income in Q1 2021, reported by the company stood at 0.51 million against CAD 1.1 million in pcp.
  

Risks associated with investment

The company is exposed to a varied range of risks ranging from regulatory risks, uncertainty in product development and related clinical trials and validation studies. Further, the company is exposed to forex risks, and investor are exposed to liquidity risk given the penny-cap market categorization of the company. 

Stock recommendation

The company has a business model with a highly competent team, a healthy balance sheet, and a strong technology and product portfolio with the potential of getting into very large markets. Further looking at the recent quarter upsurge in the R&D expenses, we believe the product portfolio is likely to bolster in the near term as higher R&D cost shows that the company is diligently working on new product development and enhancement of the efficacy of the existing product portfolio. Therefore, margin decline in the first quarter of 2021 looks temporary, and with the adoption of new technology and products, we see the financial position to further improve in the near future. On the valuation front, the stock is trading at an EV/SALES multiple of 2.14x on an NTM basis as compared to the industry (Healthcare) median of 6.0x. Therefore, based on the rationale discussed above and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 0.57 on July 28, 2021 with a lower double digit (in percentage terms) upside potential.

Technical Analysis Summary

One-Year Technical Price Chart (as on July 28, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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.