Warren Buffet Boosts Home Capital Group Inc. (HCG:TSX), is Superior Plus Corp. (SPB:TSX) a BUY/SELL/HOLD, Small-Cap Penny Stock Sandvine Corp. (SVC:TSX) Jumps Again on Takeover Bid, and Small-Cap EXFO Inc. (EXF:TSX) Drops
We have another busy show for you this week. To start we talk STATSCAN’s recent growth numbers and dive into Warren Buffett’s lifeline investment in the much maligned, Home Capital Group Inc. (HCG:TSX). In our Your Stock, Our Take segment we take a question from a listener about, Superior Plus Corp. (SPB:TSX), an Energy Distribution and Specialty Chemicals company which has seen its shares slump somewhat over the past 3-months despite a solid financial start to the year – is it a BUY at present? Our star of the week is from our Canadian Small-Cap Coverage, Sandvine Corp. (SVC:TSX), which jumped another 11% this week after it received a competing takeover bid. Our dog of the week is EXFO Inc. (EXF:TSX), a network testing company which lost over 13% on the week after reported a loss on Friday and lowered its guidance for EBITDA for 2017 – the balance sheet is strong and we discuss whether the sell-off is an opportunity or a sign of things to come.
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Now, let’s dig into the show.
I would like to welcome again, myhost, KeyStone’s Senior Equity analyst, father of 1, and a huge Canadian Patriot who is so jacked up for Canada Day that he has tattooed a giant beaver on his chest, Mr. Aaron Dunn.
We have a mixed bag of topics to chew on at the start of our show.
1) Solid Canada growth, sentiment accelerates talk of July rate hike
Stats Canada came out with its April numbers this Friday. First-off, can I just say that this country takes a long time to push those numbers out. We are looking two to two and half months backwards with these numbers, so I would caution reading too much into them. Particularly when some of the strength was generated from the energy sectors. In April oil was trading well above US$50 a barrel, whereas today oil is in the mid-forties, despite a strong move today.
To the numbers.
The economy grew by 0.2 percent in April, STATSCAN said on Friday, matching expectations and indicating Canada continues to pick up speed after a slump triggered by the oil price crash in 2014.
The trend overall is positive.
Canada’s economy grew for a sixth consecutive month in April, while a central bank survey of business sentiment showed firms were feeling more upbeat, accelerating expectations for a possible sooner-than-expected rate hike.
The data suggested the economy carried momentum into the second quarter from the first, when growth hit an annualized 3.7 percent pace, the best in the G7, said David Madani, economist at Capital Economics.
The relatively strong number will reinforce market speculation that the Bank of Canada will raise interest rates soon.
Bank of Canada policymakers have taken a more hawkish tone this month, ramping up market expectations for a rate increase on July 12. This has helped the loonie rebound somewhat as it recently hit a nine-month high.
Apparently, the chances of a rate hike in July increased to 57.7 percent following the survey, up from 51.4 percent just before it was released and significantly higher than the 20 percent markets were pricing after subdued inflation data last week.
The central bank cut rates twice in 2015 to keep the economy on track. A Reuters poll in May before the central bank adopted a more hawkish tone had showed most economists did not expect a rate hike until 2018.
Statscan said 14 out of the economy’s 20 sectors grew in April. Service-producing industries posted a 0.3 percent gain while the goods sector was largely unchanged as a decline in manufacturing offset growth in mining, quarrying and oil and gas extraction.
Statscan said 14 out of 20 sectors grew in April. Service-producing industries posted a 0.3 percent gain while the goods sector was largely unchanged as growth in mining, quarrying and oil and gas extraction was largely offset by a decline in manufacturing.
Wholesale and retail trade both increased while arts, entertainment and recreation jumped by 2.8 percent, in part because five Canadian hockey teams took part in the first round of play-offs.
Out on the West Coast, we saw no bump as our Canucks are frankly, terrible.
Small-Cap Star of the Week – Sandvine Corp. (SVC:TSX)
One of KeyStone’s Top Canadian Stock Picks for 2017
Industry: Communications – Software & Hardware
Recommended: December 2014
Recommendation Price: $3.02
Current Price: $4.26
What does Sandvine do?
Sandvine Incorporated is a networking equipment company based in Waterloo, Ontario, Canada. Sandvine’s network policy control products are designed to implement broad network policies, ranging from service creation, billing, congestion management, and security.
We highlighted Sandvine about a month ago in this Segment after its shares jumped 22% when it announced it received a bid to be acquired at $3.80 by Vector Capital – a global private equity firm.
At the time, KeyStone recommended clients continue to HOLD the stock as there was a potential for a competing bid.
This past week shares in Sandvine rose another 10% after the company announced that it had received a binding offer from Francisco Partners an American private equity firm focused exclusively on investments in technology. The superior bid is for cash consideration of CND$4.15 per share. The offer was solicited by Sandvine during the “go-shop” period permitted under its agreement with Vector Capital.
The stock is trading at $4.29, a premium to the $4.15 offer. The market is expecting an speculating on another superior bid. This may occur, but it is far from a certainty and we have advised risk adverse clients in this regard.
Vector, the company which put forth the original offer at $3.80 now has the right to match or best the new offer. The end of Vector’s matching period puts us close to the end of the “Go-Shop” period. Vector has until July 6 to match Franciscos offer. The “Go-Shop” period ends on July 7 after which the break fee increases to C$16.9mm from C$8.4mm.
Time is tight for a bidding war but the market appears to believe the potential for a superior bid outweights the time constraints. Either way, Sandvine has proven to be a great investment in 2017 for our clients and, more importantly, its gains this week give it the coveted status of our Star of the Week.
Your Stock Our Take
Can you discuss SUPERIOR PLUS CORP (SPB:TSX)
· Superior Plus is an energy distribution and specialty chemical manufacturing company.
· The Company’s Energy Distribution segment provides distribution, wholesale related services in relation to propane, heating oil and other refined fuels.
· The Specialty Chemicals segment is a supplier of sodium chlorate to the pulp and paper industry and a regional supplier of potassium and other products in the United States Midwest.
· The company released first quarter financial results on May 2nd.
· Some of the highlights include:
o 24% increase in adjusted cash flow per share to $0.77.
o Paid $434.8 million to Gibson Energy for the right to acquire Canwest Propane upon satisfaction of certain conditions, including receipt of regulatory approvals. Superior anticipates the acquisition will be completed in the second half of 2017.
o The company announced guidance for AOCF per share of $1.50 to $1.75 which was updated due to the impact of the Canwest Transaction.
o “Superior has had an excellent start to 2017,” said Luc Desjardins, Superior’s President and Chief Executive Officer. “The acquisition of Canwest is anticipated to significantly enhance Superior’s current Energy Distribution business, while positioning the business for oilfield activity recovery and increasing demand in Western Canada. I’m pleased with the results from the Energy Distribution business as we faced warmer than average weather in Central Canada and the Northeast U.S. in the early part of the quarter.”
· On face value, the financial results seem to look quite good and the outlook positive.
· However, the share price dropped immediately after the release of the Q1 results and is down 13% overall to date.
· What happened is that is spite of the company reported pretty good growth in Q1 they still missed analyst estimates.
· Analysts were expecting revenue of $739.7 million and earnings of $0.37 per share, while the company reported revenue of $675.7 million and earnings of $0.34 per share.
· The miss wasn’t too bad and as long as they can get achieve their targets then the share price should at least stabilize.
· It does pay a nice yield of 6% which is covered by the earnings and cash flow.
· There are a few concerns I have though.
· One is that the historical financial performance has been volatile. This is generally a function of the business they are in which has commodity price sensitivity and where volumes can fluctuate.
· Another is that the acquisition they are doing from Gibson Energy.
· I happen to know that the assets they are acquiring are fairly exposed to commodity prices and this was one of the reasons that Gibson was selling them.
· Overall it doesn’t look like a bad company although I would rate it as being higher risk.
EXFO Inc. (EXF:TSX)
EXFO develops smarter network test, monitoring and analytics solutions for the world’s leading communications service providers, network equipment manufacturers and webscale companies.
The stock dropped over 6% today and over 13% on the week.
The company disappointed on the earnings front in its third quarter reported late yesterday. Net loss in the third quarter of fiscal 2017 totaled US$4.3 million, or US$0.08per share, compared to net earnings of US$0.9 million, or US$0.02 per share, in the same period last year. We do not that the loss was not nearly as bad as it appears as it included US$3.6 million in after-tax restructuring expenses, US$0.9 million in after-tax amortization of intangible assets, US$0.4 million in stock-based compensation costs – but there was also a foreign exchange gain of US$1.7 million.
What was most disappointing was that the company reported it will now miss its 2017 EBITDA guidance.
To quote management directly, the CEO stated they will “fall short of our $26 million adjusted EBITDA target for 2017 with adjusted EBITDA at $13.5 million after 3 quarters into the fiscal year. Delayed spending by communication service providers on large system-based solution and a non-profitable passive wireless monitoring product line prompted us to revise our expectation towards an adjusted EBITDA at approximately $20 million for fiscal 2017.”
Mitigating Circumstances Causing the Quarterly Loss
In early May, EXFO announced a restructuring plan to streamline its monitoring solutions portfolio. This plan, which resulted in US$3.8 million of restructuring charges in the third quarter of 2017, is expected to generate annual cost savings of US$8.0 million.
“Although bookings were robust at US$63.7 million, the timing of orders and necessity to rebuild backlog affected our financial results in the third quarter of 2017,” said Philippe Morin, EXFO’s Chief Executive Officer. “Looking at the bigger picture, we continued capturing market share in optical and high-speed Ethernet testing in the field, data centers and labs as reflected by sales and bookings growth of 6.2% and 4.2% nine months into the fiscal year. We also addressed an underperforming product line within our monitoring solutions portfolio and fined-tuned our go-to-market strategy to sharpen our focus and enhance profitability. We should begin benefitting from our restructuring efforts in the fourth quarter, but the full impact will be felt in fiscal 2018.”
Exfo has a strong balance sheet with over US$34 million or $0.85 per share in cash which is over 15% of its market cap and no debt.
Our issue with the business from a quarter to quarter basis is that earnings can be unpredictable and lumpy – once again, this formula has played out in 2017.
We monitor the company closely as it checks off a decent number of our boxes in terms of investment quality and there may be an opportunity if the share price slumps further.
It’s share price losses make it our Dog of the week, but we do not consider the business a long-term loser.
There is the potential for solid growth in Q4 and into 2018.