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 

• 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 mainly attributed to improved market share of North America, finer geographic mix and dynamic pricing environment observed in the Q2 2020.

• 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.

• Improving operating matrix: Despite the turmoiled period, the Company maintained its pace and witnessed spirited performance across its gross margin, operating margin and net margin. The Company is continuously conducting drilling activities along with volume, which is appreciable. We believe the momentum to continue in the foreseeable future, as the Company had big capital investment plans to support future growth.
  

• Improving scenarios for drilling activity: The land drilling activity in North America has paced up almost double after plunging in June 2020 however it’s still on the lower side from the 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.

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 would likely to 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 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 7.99 on September 14, 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 September 14, 2021). Source: Refinitiv, Analysis by Kalkine Group

Titanium Transportation Group Inc

Titanium Transportation Group Inc (TSXV: TTR) is an assets-based transportation and logistics firm that provides services like, truckload, dedicated, cross-border trucking services, freight logistics, warehousing, and distribution. The company is organized into two segments namely, the Truck Transportation segment and the logistics segment.

Key highlights 

• Robust Q2 2021 results: The company delivered a fourth consecutive quarter of record revenue, an increase of 165.6% to CAD 100.8 million mainly driven by significant growth in both the Truck Transportation and Logistics segment. The company surpassed the CAD 100 million revenue milestone for the first time in the company's history. Further, an increase of 141.0% was witnessed in the adjusted EBITDA at CAD 7.5 million, while adjusted EBITDA Margin stood at 8.1%.
• Acquired International Truckload Services (ITS) Inc: Titanium recently purchased International Truckload Services (ITS) Inc., which gave the company 330 power units, 1,600 trailers, and 470 staff and drivers. The ITS Group, which contributed CAD 15.9 million to the company's transportation revenue, is being successfully integrated. Furthermore, the firm anticipates an annual revenue contribution of CAD 80 million, which is significant.
• Healthy guidance for 2021: As economic conditions improved, in part reflecting the loosening of some of the restrictions relating to the ongoing COVID-19 pandemic, Titanium’s strategic investments in growth opportunities and focused execution helped the management in Increasing its FY2021 annual guidance to clock the revenue of approximately CAD 350 million and an EBITDA of CAD 33 million.

Financial overview of Q2 2021 (in Canadian dollars)

Source: Company 

• In Q2 2021, the company reported revenue increase of 165.6% to CAD 100.8 million, against CAD 37.9 million in the previous corresponding period. The increase in revenue mainly attributed to both organic growth in the S freight business and inorganic growth via ITS acquisition.
• On the back of higher revenue, the total expenses increased to CAD 93.0 million in Q2 2021, against CAD 32.6 million in pcp. Total expenses as a % of revenue increased to 92.4% from 86%.
• Operating income in the reported period for the company increased to CAD 7.7 million against CAD 5.3 million in Q2 2020.
• The company posted slightly higher income before income tax at CAD 1.3 million against CAD 1.2 million, primarily due to higher revenues and operating income.
• The company’s net income for the reported period stood at CAD 0.93 million against CAD 0.87 million in the previous corresponding period.
  

Risks associated with investment

The Company's business is subject to several risk factors, including duration and impact of the COVID-19 pandemic to the global economy. Further, the company is exposed to forex risks as majority of the group’s revenue comes from the abroad market, especially U.S Dollars.

Valuation Methodology (Illustrative): EV to EBITDA  

Stock recommendation

Even though the COVID-19 pandemic has created one of the most difficult working situations in history, the firm has produced a strong financial and operational performance. Recently, Titanium acquired International Truckload Services (ITS) Inc., which contributed CAD 15.9 million to its trucking revenue. Furthermore, the company expects a contribution of CAD 80 million in annual revenue, which is appreciable. The company also expects to deliver operating synergies and realize improved profitability in the trucking segment through the second half of the year as it leverages its scaled fleet and increased capacity. Additionally, the company is also increasing its footprint in US and wants to tap a huge opportunity, which is a key positive. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 3.02 on September 14, 2021. We have considered PAM Transportation Services Inc, Algoma Central Corp, TFI International Inc. etc., as a peer group for comparison purpose.

*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 September 14, 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.