Pason Systems Inc.

Pason Systems Inc. (TSX: PSI) is a leading global service provider of specialized data management systems for drilling rigs. Its solutions include data acquisition, wellsite reporting, remote communications, web-based information management, and analytics, enable collaboration between the rig and the office. 

Key highlights 

• Robust operating results: In Q2 2021, the North American land drilling activity increased by 37% compared to Q2 2020. Increased industry activity in North America and foreign markets, along with a stronger competitive position, resulted in a 62% rise in consolidated revenue to CAD 43.6 million and Adjusted EBITDA at CAD 12.8 million, compared to a CAD 0.8 million Adjusted EBITDA loss in pcp.

• Strong competitive position: In Q2 2021, the company maintained its strong competitive position. Revenue per Industry Day was CAD 728, an increase of 13% from the comparable period in 2020. The increase was due to an increase in North American market share, geographical mix, and further reflects the challenging pricing environment experienced in the second quarter of 2020.

• Improving scenarios for Drilling Activity: Many indicators point to continued land drilling activity in North America, which is a huge positive for the company. North American land drilling activity has more than doubled since bottoming in June 2020, but still remain significantly lower than pre-pandemic levels. Industry experts expect the US land rig count to grow from 475 rigs today and exit 2021 at approximately 500 rigs and to push toward 600 rigs in 2022, while the Canadian land rig count is also expected to grow further through 2022.
• Industry beating margins: Despite the hard time, the management’s solid determination helped them leaping the industry median margins on many fronts in Q2 2021, which is a key positive. The chart below gives a glimpse of this.

Financial overview of Q2 2021

Source: Company

• The company generated CAD 43.6 million in revenue in the second quarter of 2021, a 62% increase from the CAD 26.8 million generated in the previous corresponding period as industry activity improved significantly.
• Gross profit for the reported period stood at CAD 17.6 million, an 11% increase compared to CAD 15.8 million in pcp, primarily due to increased revenue and lower depreciation and amortization.
• The company reported an income before income tax at CAD 6.9 million compared to a loss of CAD 5.9 million in pcp, partially offset by higher other expenses.
• Net income in Q2 2021, stood at CAD 4.9 million, against a loss of CAD 4.8 million in pcp, primarily due to rationales discussed above.

Risks associated with investment

Due to high dependency on the oil and gas clients, the adverse effect on crude oil demand can hit the company's revenues. Lower demand for crude oil would result in lower drilling activity, which would impact the company's prospects. Furthermore, the supply chain disruptions and prevailing rates of inflation will likely put some pressure on margins, at least in the short term.

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

The Company reflected strong competitive positioning, prudent balance sheet, and operating leverage as industry conditions continued to improve from the lows experienced in 2020. Although improved results still reflect ongoing headwinds associated with the COVID-19 pandemic on the oil and gas industry. Moreover, the Company continues to invest in the technology and service capabilities it needed to retain its competitive position. Despite this, numerous signs indicate to land drilling in North America continuing to grow, which is important for the company. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 7.90 on August 23, 2021. We have considered Computer Modelling Group Ltd, Mullen Group Ltd, Ensign Energy Services 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

1-Year Price Chart (as on August 23, 2021). Source: Refinitiv, Analysis by Kalkine Group

GURU Organic Energy Corp

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

Key highlights 

• Improving retail presence: The company increased its retail footprint by 6,100 points of sale to over 21,000 since the beginning of the fiscal year. It just revealed an additional 800 doors at The Fresh Market, Weis Markets, and Raleys in the United States, as well as in Canadian Tire Gas+ in Canada, in addition to the 5,300 doors disclosed in Q1. With the addition of The Fresh Market, the company has now fully penetrated the U.S. natural channel, further strengthening its health and wellness positioning, which is a key positive. 
• Online sales platform continues to perform well: Consumer behavior has altered as a result of the pandemic, and the company's online sales have consistently done well in both Canada and the United States as a result of shift in buying pattern of consumers during the past several quarters.
• Signed national distribution agreement: Recently, PepsiCo Beverages Canada has inked a distribution agreement with the company to become its sole national distributor of plant-based energy drinks beginning October 4, 2021. We believe that GURU's Canadian development ambitions will be considerably accelerated by this long-term arrangement, since the firm will benefit from PepsiCo Beverages Canada's extensive direct-to-store distribution network across the country.
• Launched new product in the U.S. Market: GURU Yerba Mate, the company's latest product and the top-performing energy drink in Quebec's main market, has been introduced in the United States. We feel that expanding the organic product line would help the company's brand exposure and positioning in the United States. Moreover, it would continue to benefit on the strength of its brands and significant demand for healthier choices in the fast-growing energy drink sector.

  Financial overview of Q2 2021

Source: Company 

• The company announced its quarterly result, wherein its revenue increased by 74% to CAD 7.1 million compared to CAD 4.1 million in the previous corresponding period (pcp). The increase was due to sales growth in Canada and the US, as a result of increased points of sale in both the markets.
• Gross profit totaled at CAD 4.4 million in Q2 2021, an increase of 82% compared to CAD 2.4 million in pcp. Gross margin also improved to 63% compared to 60% in pcp. The increase was due to a stronger product mix and the timing of promotional activities.
• The quarter was marked by a higher selling, general and administrative expense (CAD 5.5 million v/s CAD 3.2 million in pcp). It also witnessed higher financial expenses and reverse acquisition expenses in the reported period, due to which the loss before income tax increased to CAD 1.2 million against CAD 0.8 million in pcp.
• The group reported a net loss of CAD 1.2 million v/s CAD 0.6 million in pcp.
  

Risks associated with investment

The company’s financials could be significantly impacted by a sharp rise in the SG&A expenses, which could have a drag on its financials. Other factors are ranging from change in consumer taste and preferences, arrival of substitutes, intense competition, price risk, increase in raw material prices. 

Stock recommendation

The company delivered another record quarter, with a 74% increase in sales and gross margins of 63%. Online sales also continue to perform very well in both Canada and the U.S., driven by evolving consumer behaviors. Recently the company inked a long-term distribution agreement with PepsiCo Beverages Canada, and we believe that the company would benefit from PepsiCo Beverages Canada's extensive direct-to-store distribution network across the country. Furthermore, the company has a strong financial position with access to more than CAD 24 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, bright prospects and risk associated, we believe the growth is likely to continue in the coming quarters. Hence, we recommend a ‘Speculative Buy’ rating on the stock of GURU at the closing price of CAD 17.07 on August 23, 2021 with lower double digit upside potential.

Technical Analysis Summary

One-Year Technical Price Chart (as on August 23, 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.