Pason Systems Inc.

Lower Commodity Prices to Act as a Spoilsport: Pason Systems Inc. (TSX: PSI) is a leading global provider of specialized data management systems used for drilling rigs. The Group offers remote communications, web-based information management, data acquisition, wellsite reporting, and analytics, enable collaboration between the rig and the office. 

The Company declared a dividend of CAD 0.19 per share, payable on June 29, 2020. To cater to the current uncertainties, the Company took a prudent step of lowering its next quarter dividend distribution to CAD 0.05 per share. The above step will support the Company’s cash flows in the coming quarters.

Q1FY20 Financial Highlights: PSI announced its quarterly results, wherein the company reported a 10% y-o-y decline in revenue of CAD 73.96 million, due to the decline across all operating segments. A major plunge in drilling activity on account of lower capital spending by oil companies in the U.S. further enhanced the decline, which was partially offset by decent growth in industry activity across the Canadian market. Adjusted EBITDA fell 18% y-o-y to CAD 33.31 million, due to a slump in the gross profit across the US business unit, partially offset by an increase in gross profit in the Canadian business unit. Net income stood at CAD 16.55 million, as compared to CAD 19.04 million in pcp, due to lower gross profit and increase research & development expense, partially offset by a recovery from stock-based compensation. The Group reported a 26% y-o-y decline in its fund flow at CAD 26.7 million. Capital expenditure stood at CAD 3.08 million, drastically lower than the CAD 10.32 million in pcp.

Q1FY20 Financial Highlights (Source: Company Reports)

Stock Recommendation: The PSI stock witnessed a sharp correction of ~66% in the last one year as the plunge in oil prices resulted in lower drilling activities, which is not good news for the company. PSI offers integrated services to the oil-mining companies. Notably, a lower capital expenditure from oil companies due to falling crude-oil prices took a hit on the revenues and margins of the company. We expect the global oil demand to remain soft, at least in the near-term, which would result in a lower operating activity by the oil-producing companies in the coming quarters. To weather the current crisis, the Group has lowered its capital investment plan and dividend distributions, in order to infuse liquidity to continue operations. Despite the decline in the stock price, the PSI stock is trading at an unattractive valuation. PSI stock is trading at higher valuation multiple when compared to the industry. For instance, it is trading at a forward EV/EBITDA of 9.6x higher than the industry average of 8.9x (Oil & Gas Related Equipment Services). Hence, we recommend a ‘Watch’ rating on the stock at the closing market price of CAD 7.04 as on May 01, 2020.

PSI One-Year Daily Price Chart (Source: Thomson Reuters)

Exco Technologies Limited

Exco Technologies Limited (TSX: XTC) is a designes and develops dies, moulds, components and assemblies, and consumable equipment for various industries such as diecast, extrusion, and automotive industries. The Company operates in business segments, namely, Casting and Extrusion segment and Automotive Solutions segment.

The Company declared its second-quarter dividend of CAD 0.095 per common share. The Automotive production has been halted on account of COVID-19 crisis and is expected to resume operations in early May 2020.

Q2FY20 Financial Highlights: XTC declared its quarterly results wherein, the company reported sales of CAD 120.24 million, as compared to CAD 123.46 million in the previous corresponding period. The decline was majorly attributable to a slump in revenue from casting and extrusion segment and a marginal decline income from Automotive Solutions segment. Within the automotive segment, the group reported a 16% lower volume on y-o-y basis, due to the sector-wide weakness. Adjusted EBITDA stood at CAD 17.64 million, as compared to CAD 16.30 million in the previous corresponding period. The improvement was driven by lower cost of sales and lower selling, general and administrative expenses. Net income stood higher at CAD 9.49 million, as compared to CAD 8.56 million in pcp. Free Cash Flow stood higher at CAD 12.49 million, as compared to CAD 8.21 million in Q2FY19. The Company exited the quarter with a cash balance of CAD 35.65 million, higher than CAD 26.48 million in FY19.

Stock Recommendation: The XTC stock corrected by ~30% in the last one year on account of the weakness in the automobile sector. The Company caters to the automobile and several industrial companies across the North American and European markets. The automotive production facilities are currently closed and expected to re-open in early May 2020. The Casting and Extrusion segment reported a decent quarter, amidst a slowdown activity by the Original Equipment Manufacturer (OEM) segment. We are skeptical of the upcoming demand within the Automobile segment across the Eurozone and North America. The current slowdown on account of COVID 19 has taken a toll on the Auto-sales and the slowdown in likely to persist in coming quarters. We expect a decline in the order book of the company resulting in softness in the top line. Further, the stock is trading at an EV/EBITDA multiple of 3.9x on TTM basis, as compared to the industry (Industrial) average of 3.6x. The TTM Price to Earnings multiple is also higher than the industry average. Hence, we recommend a ‘Watch’ stance on the XTC stock at the closing market price of CAD 6.38 as on May 1, 2020.

XTC One-Year Daily Price Chart (Source: Thomson Reuters)

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