KeyStone’s Your Stock Our Take – Solium Capital Inc. (SUM:TSX), Star: is Sangoma Technologies Corp. (STC:TSX-V), Dog: LXRandCo Inc. (LXR:TSX)
This week in our Your Stock, Our Take segment we look at Solium Capital Inc. (SUM:TSX), who’s core cloud enabled software-as-a-service offering, Shareworks, helps both private and public companies with issuance and exercise of equity (stock) incentives and the plethora of financial reporting and compliance documents they are required to file. Is it a BUY, SELL, or HOLD – we’ll tell you. Our Star of the week is Sangoma Technologies Corp. (STC:TSX-V), from our Canadian Discovery Small-Cap Portfolio. The stock is up 38% this month driven by strong Q3 earnings. Finally, our Dog of the week is LXRandCo Inc. (LXR:TSX), a unique “re-commerce company” that takes used or “pre-loved” handbags and re-sells them. The stock has been cut in half over the past month to trade under a $1.00 after it reported strong revenue growth, but continued sharp losses on its bricks and mortar expansion.
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Now, let’s dig into the show.
I welcome back my co-host, KeyStone’s VP and Senior Analyst, and a man so impressed by the NHL’s expansion Vegas Golden Knights Cinderella Stanley Cup Run, he has proposed the Vancouver Canucks immediately sell the team and buy back a new Vancouver expansion club as a faster way of getting a actually respectable NHL team for the Vancouver market. Welcome back Aaron.
I think it would be a faster rout that what we see today – death by a thousand cuts, sorry trades, even sorrier free-agents, and a lack of draft picks…but I digress. We get no sympathy from our listeners in Calgary or Edmonton.
Your Stock, Our Take
Terry in Sarnia – I love Solium Capital and have owned it for the past year – the last quarter had good sales growth but the decline in earnings concerns me. Your opinion?
Solium Capital Inc. (SUM:TSX)
Stock Trades at: $11.13
Market Cap: $ 622.43 million
What does the company do?
Solium Capital provides cloud-enabled services for equity-based incentive plans including administration, financial reporting and compliance. The company’s core software-as-a-service offering, Shareworks, helps both private and public companies with issuance of equity (stock) incentives, the exercise of incentives, reporting of incentives and day-to-day maintenance of the incentives database.
Q1 Financial SnapShot
- Revenue increased 23% to $26.1 million from $21.2 million in 2017.
- Adjusted EBITDA dropped 30% to $3.5 million from 2017.
- Net earnings sunk 50% to $1.3 million.
Very Strong Balance Sheet: Cash on hand as at March 31, 2018 totaled $87.0 million and the only debt is roughly $12.5 million in lease liabilities.
Our Take
Solium is an interesting study. We like the business and the sticky nature of its software clients. The balance sheet is strong and the client list includes some great names. The multiples you are asked to pay for the stock at current prices and based on current cash flow are high. The PE with cash removed is in the range of 70 and the price to FFO cash removed is just under 40 based on the numbers for the last 12-months. The number are “artificially” high in the near-term as Solium continues to be in an investment phase and remains committed to investing for future revenue growth over the course of 2018, resulting in further pressure on profitability in the near-term. Solium entered into white label license agreements with U.S. partners Morgan Stanley and UBS Financial Services Inc. Solium added significant headcount and committed additional resources to ensure the success of these projects, and some hiring is anticipated to continue throughout 2018. The first customers for both partners were migrated to Shareworks in December 2017, and the company is now actively migrating clients on a monthly basis. But, it will take until the end of 2019 to onboard all customers. Until then, costs are not aligned with the current customer base as efficiently as they will be.
As an investor, if you are looking 3-5 years forward, we like Soliums’ business and believe it will outperform the market average return over this time. Near-term, the stock could be volatile but it is a quality business and for long-term growth investors the stock could be an option on 10%+ pullbacks. We actively MONITOR the stock.
HOLD if owned long-term – monitor for potential entry point.
Weekly Star
Sangoma Technologies (STC)
Price: $1.32
- Stock up 35% over the past month on strong financial results.
- Sangoma is a communications technology company.
- They provide software and hardware businesses.
- That’s voice over IP, data and video products.
- It sells mostly to small and medium sized enterprises.
- Big quarter released on May 15th.
- Sales increased 138% to $16.2 million.
- Operating income nearly tripled to $1.4 million.
- Earnings per share doubled to 1.5 cents.
- The results were largely driven by an acquisition made in the previous quarter.
- For fiscal 2018, the company is expecting revenue of $55 million and EBITDA of $6 million.
- That would be a doubling of revenues and more than a doubling of EBITDA.
- We just put out a report on the company as a SPEC BUY for High Risk in October at a price of 72 cents.
- So it has almost doubled since that report was issued.
- It looks like a nice little micro-cap company right now with a lot of momentum behind it.
- I would love to say more but we are going to be updating our coverage on it for clients.
- Is it a BUY, SELL, or HOLD at this price?
- You’ll have to become a client to find out.
Dog of the Week
LXRandCo Inc. (LXR:TSX)
A unique “re-commerce company” that takes what they call slightly used or pre-loved handbags essentially and re-sells them – call it a high end second hand store – a really, really high end consignment store.
In fact, we found a used Hermès bag on their site for $34,000 (used or otherwise, that is fricking ridiculous for a handbag). But, apparently, the retail or new price would be roughly $70,000.
The average price of an item is about $750 – so far less, but for a handbang, particularly a used handbag…?
LXRandCo Inc. (LXR:TSX)
- LXRandCo Inc is a luxury retailer that specializes in authentic handbags and accessories from designer brands including Hermès, Chanel, Louis Vuitton, Gucci, Prada, ETC…Ferragamo, Miu Miu, Cartier, Dior, Chloé, and more.
- The Stock is down 10% since May 24th and is down 50% since May 2nd. It is trading today (mid-day May 30th) at $0.95 compared to $1.05 on the 24th and $1.89 on May 2nd.
Relevant News
- On May 4th, an earnings report was released that, although reporting strong revenue growth, reported a significant net loss for the period
- The majority of this loss was due to an increase in SG&A expenses, which arose because of an 88-store expansion during 2017
Earnings/Growth (Q1 2018 compared to Q1 2017)
- Revenue was $9,972,514 compared to $6,145,962, up 62%
- Gross Profit was $2,358,821 compared to $1,804,508, up 31%
- Operating income was a loss of $4,181,933, compared to a loss of $1,013,200
- This loss is primarily due to selling, general, and administration expense of $6,270,727 (in Q1 2017 it was $2,734,716)
- Net loss of $4,326,403 compared to net gain of $3,762,602
- Q1 2017 would have been a net loss as well if not for a gain on expiration of warrants of $3,195,459 and a non-recurring gain from a step business combination of $2,070,422
- Fully diluted earning per share was -$0.28 (negative) compared to a gain of $0.53
- Adjusted EBITDA was -$3,911,906 (negative) compared to -$930,208 (negative)
- Fully diluted adjusted EBITDA per share was -$0.25 (negative) compared to -$0.13 (negative)
Management Outlook
- Mr. Goldsmith, CEO – “Upon review, it is clear to me that the Company’s intent to meet the significant unmet demand for its stores led it to do so in an unprofitable and less than efficient manner…It is my intention to work with the team to identify our successful partner relationships, as well as new partnering opportunities, and to leverage my retail and online experience to develop a balanced action plan with a specific focus on disciplined growth, increased gross margin and profitability across all distribution channels. The Company expects to publicly communicate any resulting changes to its business model, growth strategy, and/or outlook at the Company’s upcoming Annual Meeting of Shareholders to be held on June 13, 2018 in Montreal.”
Balance Sheet
- Current Ratio: 6.30
- Cash Ratio: 1.64
- Current assets can cover all total liabilities
- Overall, seems to be quite healthy
Valuation
- Negative earnings so no PE or Price to EBITDA. Does not meet criteria
The company has some impressive fashion/business names involved including – retail icon Joe Mimran (the founder of Club Monaco and Joe Fresh), who is director and chair of the company’s international business development committee. Mimran is also a Dragons’ Den dragon.
But is has had zero impact on the bottom line. We understand the company is utilizing “pop-up”, not full sized stores in its model, but in a tough bricks and mortar environment, we question the need to be expanding so fast into retail when the business should just be able to grow online.
