Computer Modelling Group Ltd

Stable Debt Free Balance Sheet and Ample Liquidity: Computer Modelling Group Limited (TSX: CMG) is a is a Canada-based provider of reservoir simulation software for the oil and gas industry. As on 13 August 2020, the market capitalization of the company stood at ~CAD 432.54 million

Quarterly Performance (For the Period Ended 30 June 2020): During the quarter ended 30 June 2020, Annuity/maintenance license revenue and total revenue of the company decreased by 8% due to the impacts of the COVID-19 pandemic. In the same time span, the company witnessed a decline of 17% in EBITDA to CAD 6.7 million. During the three months ended 30 June 2020, realized basic EPS stood at CAD 0.04 and achieved free cash flow per share of CAD 0.05. The company closed the quarter with a stable debt free balance sheet and a cash balance of CAD 51.2 million.

Quarterly Financial Highlights (Source: Company Reports)

Outlook: The company is focused on ensuring the resilience of its business by adjusting its cost structure. It has taken various cost reduction measures and is protecting liquidity and seems to be well positioned to deal with these uncertain times.

Key Risks: The company is exposed to a variety of risks and uncertainties including failure to comply with its strategic plans, inadequate future capital. It is also susceptible to financial risks including market risks, credit risk and liquidity risks.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company has taken various measures to protect its’s profitability and optimize free cash flow generation to maintain its balance sheet strength. It is also focused on delivering a sustainable dividend. As per TSX, the stock of CMG is trading slightly above its 52-week average levels and retains potential for further growth. The stock of CMG gave a return of 24.19% in the past three months and a return of 21.67% in the last one month. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). Considering the current trading levels, decent returns in the past three months, debt free balance sheet and ample liquidity, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 5.39, up by 6.01% on 13 August 2020.

CMG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Sierra Wireless Inc.

Sierra Wireless Inc. (TSX: SW) is the leading IoT solutions provider which combines devices, network services and software in order to stay connected. The Company offers IoT services, which are used to improve operational efficiency, create better customer experiences, improve their business models and create new revenue streams.

Recently, the Company announced to divest its Shenzhen, China-based automotive embedded module product line to Rolling Wireless (H.K.) Limited at a price consideration of USD 165 million.

Q2FY20 Financial Highlights: SW declared its quarterly results, wherein the Company reported revenue of USD 144.062 million, reflecting a decline of 24.7% on y-o-y basis. The decline was primarily attributable to lower automotive revenue which impacted Embedded Broadband sales. The group recorded a decline in IoT Solutions revenue on account of lower hardware sales in Enterprise gateway products and IoT Solutions modules due to the impact of COVID-19. Gross margin dipped to USD 45.9 million, as compared to USD 59.0 million in the previous corresponding period (pcp), while gross margin as a percentage of revenue stood higher at 31.8% against 30.8% in pcp. Loss from operations contracted to USD 17.83 million, as compared to USD 23.271 million in Q2FY19 due to a significantly lower restructuring expense, a slide in sales and marketing expense while higher amortization costs and slightly higher research and development expense remained a drag. The Company reported a net loss of USD 15.607 million as compared to USD 28.176 million, a year ago. The Company ended the quarter with cash and cash equivalent of USD 60.111 million while total assets stood at USD 629.791 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The current economic downturn on account of COVID 19 had impacted the segments of the company in an adverse way through lower automotive revenue and soft demand for its hardware products. Continued shutdowns or other business interruptions could result in material and negative effects on the company’s ability to conduct business.

Valuation Methodology: EV to Sales Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of SW surged ~40% and ~74% in the last six months and nine months, respectively as long-term investors are leaning towards new generation businesses due to increase usages of the Internet and related services in the recent past. Recently announced divestiture of the embedded automotive business is likely to result in reduced operating expenses by approximately USD 20 million, which is expected to improve the margins and boost its cash flow. The Company is preparing to launch its 5G embedded modules and routers in the second half of FY20, which would lead to improved business prospects. Due to the rising usage work from home and other social media activities, services like Internet of Things (IoT) are higher in demand and the Company is well poised to take advantage of the upcoming opportunities. Investors should note that the stock was trading above the 200-days SMA, which indicates a bullish trend. We have valued the stock using the EV to Sales based relative valuation approach and arrived at a target price, which suggests a single-digit upside potential (in % terms). For the said purpose, we have considered peers like Digi International Inc, Qualcomm Inc etc. for the purpose. Hence, considering the aforesaid facts and current price movement, we recommend a ‘Hold’ recommendation on the stock at the closing market price of CAD 17.84 on August 13, 2020.

SW Daily Technical Chart (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.