HLS Therapeutics Inc.

HLS Therapeutics Inc. (TSX: HLS) is a specialty pharmaceutical company, which is engaged in the acquisition and commercialization of branded pharmaceutical products within North America. The company is focused on several treatment products used for the central nervous system (CNS) and cardiovascular specialties.

Key Highlights:

• Reduction in Debt: The company has reported a significant reduction in debt to USD 115.373 million in FY20, from USD 119.677 million in FY19. The reduction of debt is encouraging as it has lowered its finance costs to USD 4.012 million in FY20, from USD 14.878 million in FY19, which subsequently supported the bottom line. Moreover, a lower debt is encouraging, as it enhances the overall financial flexibility of the firm.

• Strong Traction from Vascepa®: The company reported a remarkable growth from Vascepa® molecules, despite the ongoing COVID 19 challenges. Vascepa capsules have been prescribed over 2,000 patients, a sequential increase of 70% and drug gained more than 550 prescribers at the end of Q4 reflecting a sequential growth of 55%.

Vascepa Prescription since inception (Source: Company Presentation)

• New regulation implemented by Quebec Health Minister: As per the updated law, the patients would not receive any financial assistance during the use of CLOZARIL® Support and Assistance Network (CSAN), provided by HLS. The above is a risk management program which is the last treatment option for the patients suffering from refractory schizophrenia and who do not respond to other treatments.

Q4FY20 Financial Highlights:

• HLS announced its quarterly result, wherein the company posted USD 16.485 million, higher than USD 13.937 million in the previous corresponding period (pcp). The increase was driven by higher royalty revenue of USD 4.631 million v/s USD 2.508 million in pcp.
• Operating loss increased to USD 3.706 million v/s a loss of USD 2.952 million in Q4FY19. The quarter was marked by higher cost of sales (USD 1.311 million v/s USD 0.484 million in pcp), increase in selling and marketing (USD 3.260 million v/s USD 2.028 million in Q4FY19) and higher stock-based compensation (USD 2.420 million v/s USD 2.034 million in pcp), partially supported by lower medical, regulatory and patient support cost (USD 1.284 million v/s USD 1.520 million in pcp) and lower general and administrative expense (USD 2.403 million v/s USD 2.669 million in pcp).
• The group reported a net loss of USD 7.278 million, improved from a net loss of USD 12.220 million in pcp. The improvement was primarily due to lower finance costs amounting to USD 3.372 million v/s USD 9.497 million in pcp.
• The company reported a cash and cash equivalent of USD 20.612 million, while total assets stood at USD 303.906 million.

Q4FY20 Income Statement Highlights (Source: Company Report)

Risks: Withdrawal of financial Assistance for CSAN by the Government might temporarily dampen the company’s performance.

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock Recommendation:

The stock of HLS appreciated ~12% and ~35% in the last three months and six months, respectively, owing to the increasing traction for Vascepa®. The company reported improved financial performance and posted EBITDA of USD 8.736 million in Q4FY20, higher than USD 7.236 million in pcp. Moreover, a reduction in the finance costs is also encouraging. However, the limitation of the usage of CSAN across Quebec remains a key concern for the company in the coming days. We have valued the stock using the EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Knight Therapeutics Inc, Hamilton Thorne Ltd etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 18.91 on April 13, 2021.

Price Chart (as on April 13, 2021). Source: Refinitiv (Thomson Reuters)

Rogers Sugar Inc

Rogers Sugar Inc (TSX: RSI) is a holding company of Lantic Inc. which is engaged in the sugar business. RSI along with its subsidiaries is principally engaged in refining, packaging, and marketing sugar products. The company majorly operates in two business segments: Sugar and Maple products, of which most of the revenue comes from sugar products.

Key highlights 

• 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. Moreover, at the last closing price, the stock was offering a dividend yield of ~6.5%, which is encouraging looking at the current market dynamics and interest rates.

Source: Refinitiv (Thomson Reuters)

• Expecting healthy volumes in FY2021:Strong underlying demand and a successful beet harvest resulted in higher sales volumes and improved financial performance over fiscal 2020. The management believes that the momentum to continue and expects sugar segment to perform well in fiscal 2021 also. As a result, the company has increased its full-year fiscal 2021 sales volumes guidance to approximately 776,000 metric tonnes, an increase of 15,000 metric tonnes over fiscal 2020 and 10,000 metric tonnes from previous guidance. They also expect to see improved performance in Maple segment in fiscal 2021. 

• Extension of agreement:Recently, the company announced a two-year extension to the existing deal with Alberta Sugar Beet Growers ("ASBG"). This new agreement provides ongoing security of supply for the company's customers and a balanced positive investment environment, delivering a positive outlook for Alberta's beet sugar industry.

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the company reported revenues of CAD 223.8 million, increased by CAD 14.5 million against CAD 209.3 million in the previous corresponding period. The improvement was driven by higher revenues from both Sugar and Maple segment. Sugar segment registered a growth of CAD 4.6 million and Maple segment of CAD 9.9 million, respectively.
• The reported quarter's operating income stood at CAD 23.3 million, against CAD 26.7 million in Q1 2020. The rise in admin and selling expenses and distribution expenses dragged the operating income.
• The company posted net income of CAD 13.7 million in Q1 2021, against CAD 15.9 million in the previous corresponding period. The reduction in net income was primarily due to higher operating expenses. 

Risks associated with investment

The performance of the company’s business is prone to several risks which could affect its financial performance. Risks related to the timely harvesting and health of the crop along with government regulations and foreign trade policies with regards to sugar are the most significant risks. Other risks are like fluctuations in raw sugar prices, interruption in raw sugar supply, competition, inflation, and foreign exchange exposure, etc., are beyond the management control. 

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

A significant portion of the Company's sales are made under fixed-price, forward-sales contracts, which can extend up to three years; this reflects that the Company is commanding steady revenues. Since the Company's product comes under "essential commodities" we expect uninterrupted operations in the upcoming time. The management is bullish for fiscal 2021 and they expect strong performance on the back of firm demand from customers coupled with the reduction in operational and distribution costs mostly related to the return of a normal harvest and beet sugar production in Taber, would enhance their margins. Therefore, based on the above rationale and valuation, we have given a "Speculative Buy" rating at the closing price of CAD 5.55 on April 13, 2021. We have considered North West Company Inc, Maple Leaf Foods Inc, High Liner Foods Inc, etc. as the peer group for the comparison.

1-Year Price Chart (as on April 13, 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.