Descartes Systems Group Inc

Descartes Systems Group Inc. is a technology company focused on logistics and supply chain management business processes. Its solutions are cloud-based and are focused on the productivity, performance, and security of logistics-intensive businesses.

• Proven Financial Success and Competitive Moat: Looking at the below chart, it can be gauged that the company has reported quite stable financial performance over the past four years, with Gross Margin consistently above 70%, EBITDA Margin above 30%, and Net Margin above 10%. Also, it is noted that the company has not only reported consistency, but also each of the margin matrices has improved over the same period. This kind of performance is quite uncommon, and those who maintain consistency are commanding a significant valuation premium in the market against the peers. Also, a company with a higher margin profile together with YoY growth tend to generate higher wealth for the shareholders regardless of the market volatility.

Source: Refinitiv (Thomson Reuters)

• Stock Price would Chase EPS Growth: Stocks with higher earnings-per-share growth rates are generally more desired by investors than those with slower earnings-per-share growth rate.  In the case of DSG, the company has consistently reported EPS growth over the five years. Its EPS has grown by approximately 100% in absolute terms from 2017 to 2021, and in the same period, its stock price has surged approximately 175% from 2017 January to 2021 January. Further, the future looks quite promising as Logistics and supply chain management have been evolving over the past several years as companies are increasingly seeking automation and real-time control of supply chain activities. We believe companies are looking for integrated solutions for managing inventory in transit, conveyance units, people, data and business documents. This would benefit the group in the coming future.  

EPS Growth and Stock Price Movement Comparison. Source: Kalkine Group, Refinitiv (Thomson Reuters)

• Sufficient Liquidity to Finance Future Expansion: At present, the group has sufficient liquidity to fund its current cash requirements for working capital, contractual commitments, capital expenditures and other operating needs. The group had CAD 133.7 million cash at the end of FY21. The cash balance increased from January 31, 2020 to January 31, 2021 by CAD 89.3 million primarily due to strong cash generated from operations.

Financial Highlights: FY21

Source: Company Annual Report

• Revenue increased by 7% on a YoY basis to CAD 348.7 million. The principal contributor to the increase in 2021 compared to 2020 was a full period of contribution from the acquisitions completed in 2020.
• Net income was CAD 52.1 million, an increase of 41% on a YoY basis, positively impacted by the 2020 Acquisitions, which contributed an incremental CAD 12.7 million to net income.
• Further, total operating expenses as percentage of revenue also declined to 37% in FY21 from 39% in FY20, helped by economies of scale and bolstered profitability.
• EPS grew by 38% on a YoY basis to CAD 0.62 in 2021.

Risk: DSG’s business may be impacted from time to time by the general cyclical and seasonal nature of modes of transportation and the freight market in general, as well as the cyclical and seasonal nature of the industries that such markets serve.

Stock Recommendation: From the NTM Price to Cash Flow standpoint, DSG shares are trading at a steeply high valuation against the industry average, as DSG Shares are trading at NTM Price/Cash Flow multiple of 37.5x, whereas Industry median ~25x, but we believe this valuation to sustain in future as the company is generating significantly high free cash flow for shareholders and also consistently maintained its higher margin franchise. Moreover, the consistent growth in EPS would further drive its shares higher. Therefore, we suggest a “Hold” recommendation on the stock at the closing price of CAD 72.8 on May 10, 2021.

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1-Year Price Chart (as on May 10, 2021). Source: Refinitiv (Thomson Reuters)

Goodfood Market Corp.

Goodfood Market Corp. (TSX: FOOD) is a leading online Canadian company delivering fresh meal solutions and grocery items, and related products to its subscribers.  The Company has a production facility and administrative offices in Montreal, with five additional facilities located in Quebec, Ontario, Alberta, and British Columbia.

Key Updates:

• Management Update: The group appointed Mr. Greg Christopher as Executive Vice President of Operations effective April 12, 2021. This would strengthen the core competency and competitive advantages that Goodfood is building across its operations.

• Sound Cash Flow: The group’s cash flow from operations increased by CAD 9.3 million to CAD 5.4 million in Q2 2021 compared to same period last year. The increase was due to positive change in working capital mainly by an increase in accounts payable and accrued liabilities and deferred revenues, partly offset by the increase in inventory resulting from the growth of the business.

Source: Company Reports

• Ample Liquidity: The group reported cash at CAD 163.0 million v/s CAD 67.0 million during Q1 2020. Additionally, the revolving credit facility stood at CAD 42.5 million at the end of Q2 2021.

• Decline in Debt: In Q2 2021, the group reported total debt at CAD 29.7 million, v/s CAD 35.8 million in Q2 2020. A reduction in the total debt would lead to improving the company’s overall financial flexibility and would subsequently lower the company’s finance costs. 

• Strong Growth in Subscribers-base: The group reported 30% y-o-y growth in the subscribers to 319,000 in Q2 2021. Notably, the group has added more than 13,000 customers during the quarter, driven by increasing consumer traction across the of e-commerce grocery and meal segment across Canada. In the recent past, the group focused on its e-commerce segment, while the company witnessed a whopping 1.9 million website visits during the month of January 2021.

Q2 FY21 Financial Highlights:

• Goodfood announced its second quarter result, wherein revenue stood at CAD 100.65 million, grew 71% on y-o-y basis supported by expansion of product offering and the same day delivery option. Additionally, an increase in average basket size per customer coupled with improved order frequency supported the growth.
• Gross profit during Q2 FY21 stood at CAD 30.63 million, significantly higher than CAD 17.81 million, in pcp, depicting a growth of 72%. Gross margin was stable at 30.4% v/s 30.3% in the previous corresponding period (pcp). The increase in gross profit primarily resulted from a lower incentive coupled with lower unit costs for packaging and shipping and improved agreements with key suppliers.
• The group reported an improved adjusted EBITDA of CAD 0.535 million, as compared to a loss of CAD 2.921 million in Q2 FY20. Improved adjusted EBITDA resulted from higher gross profit driven by a larger revenue base, a decrease in incentives and credits and lower unit costs for shipping and packaging.
• The company reported a higher net loss of CAD 4.03 million, as compared to a net loss of CAD 3.36 million in Q2 FY20, due to higher selling, general and administrative expenses coupled with increase in depreciation and amortization expenses and increase in net finance cost.

Q2 FY21 Income Statement Highlights (Source: Company Report)

Risks: The group’s performance depends on the consumer taste and preference, and a change in consumer preferences would lead to a decline in sales volume. Moreover, the group is expanding its operations, which has led to an increase in the selling general and administrative expense that remains a major concern.

Stock Recommendation:

During the month of February 2021, the company launch Goodfood WOW in Toronto, which would provide same-day delivery to the customers. The products include ready meals and grocery products etc. Meanwhile, the group witnessed higher visibility of its grocery items through several cross-selling strategies. We believe the above momentum to continue, supported by convenient delivery option. On the valuation front, the stock is trading at forward EV to Sales multiple pf 1.46x, which is lower than the peer median of 1.6x. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 7.60 on May 10, 2021.

Price Chart (as on May 10, 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.