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

• Improving scenarios for US Drilling Activity: Many indicators point to continued land drilling activity in North America, which is a huge positive for the company. Land rig counts in North America were down 45% in Q1 2021 compared to the previous corresponding period, but they are up more than 90% from their low point in the summer of 2020.

• Strong competitive position: The company held its firm competitive position in Q1 2021. In North America, revenue per industry day of CAD 720 was down 2% year-over-year and was unchanged from the last sequential quarter. On the other side, international revenue decreased 24% from the prior-year period and was up 23% sequentially as industry activity continued to improve across the major operating regions.

• Advancing in the solar and energy storage market: Through Energy Toolbase, the company continues to enhance its efforts in the solar and energy storage markets (ETB). Its software package for economic analysis and proposal development continues to be a popular choice among project developers, with a large subscriber base. Bookings for new installations and a pipeline of prospects for the company's energy storage control system continue to increase, providing a source of additional cash flows.

• Industry beating margins: Despite the hard time, the management’s solid determination helped them leaping the industry median margins on many fronts in Q1 2021, which is a key positive. The chart below gives a glimpse of this.

Margin Comparison, Analysis by Kalkine 

Financial overview of Q1 2021

Source: Company 

• The company generated CAD 42.6 million in revenue in Q1 2021, a 42% reduction from CAD 74.0 million induced in the previous corresponding period. The decline in revenue was primarily due to lower performance from the North American business unit and the International business unit.
• Gross profit for the reported period fell to CAD 15.8 million, against CAD 34.4 million in pcp, primarily due to lower revenues, partially benefited from lower operating expenses.
• The company reported EBT at CAD 5.2 million compared to CAD 23.5 million in pcp, partially offset by higher stock-based compensation and benefitted from extra other income.
• Net income for the reported period declined to CAD 3.9 million, against CAD 16.5 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.

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

The Company continues to invest in the technology and service capabilities needed to strengthen its competitive position. We believe that with these skills in place, it would produce substantial incremental profits as the demand recovers. Several indicators point to the continued development of land drilling in North America, which is significant for the firm. Furthermore, via Energy Toolbase, the firm continues to expand its efforts in the solar and energy storage markets, with solid bookings for new installations and a growing pipeline of prospects for the firm's energy storage control system, which offers a source of new cash flows. Based on the technical analysis the stock has support at CAD 7.58 level. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 8.74 on May 27, 2021. We have considered Industry mean multiple as a proxy to target multiple.

*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.

One-Year Price Chart (as on May 27, 2021). Source: Kalkine Research

Roots Corporation

Roots Corporation (TSX: ROOT) provides a portfolio of apparel, leather goods, accessories, and footwear for men, women, and children under the Roots brand. Its merchandise includes genuine leather, such as jackets, bags, and luggage; kids & baby clothing; and leather, linens, towels, and accessories.

Key Highlights:

• Reduction in the total debt: The company reported a lower total debt in FY21 at CAD 172.3 million, reflecting a decline of 30.50% from FY20, which is encouraging. A decline in leverage is a healthy sign and provides higher financial flexibility. Moreover, the company reported a reduction in its finance costs at CAD 11.741 million in FY21 v/s CAD 15.567 million in FY20, which has further supported the company’s net profitability. 

• Impressive Margin profile: The company reported impressive margins in FY20, which is way ahead of the industry median, despite the ongoing sluggish economic scenario. The company’s offers better products than most of the players within the industry. The company has more than five decades of product leadership which helped them to offer a diversified portfolio to its customers. Moreover, the company’s constant focus on product innovation has also led to improved product pricing, which is reflected through the company’s margins.                   

Margin Comparison, Analysis by Kalkine Group 

FY21 Financial Highlights:

• ROOT announces its full year result, wherein the company posted sales of CAD 240.506 million, lower than CAD 329.865 million in FY20. The above decline was mainly due to a slump in the store sales due to the COVID‐19 impacts, coupled with the government-mandated of temporary closure of stores, which further reduced the footfall.
• The company reported a gross profit of CAD 139.739 million, down from CAD 176.189 million in FY20 mainly due to lower revenue however compensated by lower cost of sales recorded for the period (CAD 100.7 million v/s CAD 153.6 million in FY20
• The group reported EBIT at CAD 29.7 million compared to a loss of CAD 56.9 million as previous quarter includes goodwill impairment amounting to CAD 44.8 million. The quarter witnessed significantly lower selling, general and administrative expenses (CAD 114.807 million v/s CAD 188.308 million in FY20).
• Net income stood at CAD 13.080 million, as compared to a net loss of CAD 62.029 million in the previous year. The bottom-line was partially supported by a lower interest expense (CAD 11.741 million v/s CAD 15.567 million in FY20).

FY21 Income Statement Highlights (Source: Company Report)

Risks:  Continuation of the Government restrictions would impact the company’s sales and may lead to a suppressed cash flow.

Valuation Methodology (Illustrative): Price to Earnings 

Stock Recommendation:

Despite a sluggish economic scenario, the company’s eCommerce segment reported a strong performance, which increased more than 60% on y-o-y basis in Q4FY21. Due to the recent change in consumer preferences, we have seen a strong upward move in the eCommerce segment across Canada, which is a key positive and is expected to contribute further to the company’s performance. Moreover, the company reported decent growth in its cash from operations of CAD 50.922 million in FY21, higher than CAD 40.044 million in FY20, amidst the ongoing economic cycle. We expect the company’s performance to improve as COVID-19 related restrictions ease out. Based on technical analysis, the stock has a support at CAD 2.8 level. We have valued the stock using the price to earnings-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have industry (Specialty Retailers) median on an NTM basis. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 3.44 on May 27, 2021.

One-Year Technical Price Chart (as on May 27, 2021). 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.