KeyStone’s Stock Talk Podcast Episode 111
This week we start by M&A Activity or lack thereof over the first 6-months of the year and what that could mean for the balance of 2020 and into 2021. In our Your Stock, Our Take segment we take a look at an interesting renewable energy finance company. The company, RE Royalties Ltd. (RE:TSX-V) which acquires revenue-based royalties from renewable energy generation facilities by providing a non-dilutive financing solution to renewable energy generation and development companies. Our Star of the Week is Westport Fuel Systems Inc. (WPRT:TSX), a transportation technology company, which engages in the engineering, manufacture, and supply of alternative fuel systems and components. The stock was hit hard by the Covid-19 pandemic earlier this year but is up over 37% in the past five trading days. We let you know what is driving the rebound.
The first time ever Aaron will be hosting a Live Dividend Growth Stock Focussed Webinar on July 28th.
Why are we doing this?
So many reasons – but I will give you some key reasons.
- Bonds, GICs, & savings accounts pay less than 1%, – high-quality dividend growth stocks paying 3-7% are one of your best options near and long-term.
Why look at Dividend Growth Stocks? They Vastly Outperform Non-Payers
In fact, non dividend stocks on average on the TSX has average a paltry 0.4% annually for 33 years. Dividend paying stocks have crushed this at 9.2% annually, and Dividend Growth Stocks are best of breed at 11.1% each year. This is one of the major reasons we recommend select quality dividend growth stock to our clients and have put together this upcoming Webinar on July 28th.
Now this sounds like an infomercial, it’s not, it is just math! But it gets better…not only dividend stocks significantly outperform, they do it with significantly less risk.
Non-dividend payers, dividend cutters and the TSX index itself, are far more volatile than dividend stocks. And the least risky category among dividend stock is dividend growth stocks. This is the beauty of Dividend Growth stocks – better returns and less volatility.
Example: Brookfield Infrastructure (BIP.UN:TSX)
Brookfield Infrastructure (BIP.UN:TSX) was recommended at $14.50 and has paid KeyStone clients $19.46 Canadian in dividends and shares today trade at $57.77 for a 446% return!
Learn Tips Your Advisor Does Not Want You to Know: How to use the power of traditional Dividend Reinvestment Plans (DRIPs) or Synthetic DRIPs to dollar cost average with no broker fees & even buy shares at a 2-5% discount!
Core Strategy: How to build a simple 10-15 Dividend Growth Stock Portfolio, that creates both growth and cash flow and enriches you, not your advisor.
Bonus: Aaron will give you 2-3 great Dividend Growth Stocks to BUY today.
What else will Aaron and I talk about?
Not only will you learn everything you need to know about Dividend Growth Stocks from one of the countries foremost experts, Mr. Dunn will compare bonds to Dividend Growth Stocks, discuss the landscape for Dividend Growth Stocks in Canada & the U.S. including how many companies pay dividends, in what sectors, and what is the range of yields being offered. You will also learn what sectors are most suited to pay and grow their dividends and which you should avoid. Plus, you will receive specific BUY/SELL recommendations on top Dividend Growth Stocks including our top ranked Alternative Power Dividend Payer (paying 6.5%), our top ranked Dividend Infrastructure Stock, and more!
M&A Activity in 2020?
Topline: With large parts of the world shut down due to the coronavirus, global mergers and acquisitions have been put on pause with companies being forced to abandon takeover deals as they struggle with staying afloat and paying workers.
Crucial statistic: It was the worst first quarter for M&A since 2016, Refinitiv’s data shows, as the overall number of deals declined 13% from a year ago and hit a six-year low.
Harvard Business Journal
Is the coronavirus pandemic and corresponding economic downturn a time to halt acquisitions or pursue them? There are high profile examples of each. Boeing, for example, has abandoned a $4 billion deal to acquire 80% of Embraer’s commercial jet business and a 49% stake in a joint venture producing a new military cargo jet. At the same time, companies such as Google Cloud, Nestle SA, BlackRock, the British clothing company Boohoo, and others have all publicly stated that they are open to acquisitions despite the uncertainty created by coronavirus.
One other reason – valuations are high. While this is good for acquirers issuing shares to fund acquisition – those same acquirers are being asked to pay high premiums in some cases.
There may be some activity when things open up even more. We are seeing some companies raise capital to have it at the ready. Sangoma and Sylogist to name two from our coverage in the past week.
Your Stock Our Take
|I would love your take on re royalties. I love their business model and they have some good royalty streams already setup. They also have a great balance sheet and lots of tail winds||July 27, 2020|
RE Royalties Ltd. (RE:TSX-V)
Current Price: $1.00
Market Cap: $32 Million
Dividend: $0.01 – roughly 4% yield.
What does the company do?
RE Royalties acquires revenue-based royalties from renewable energy generation facilities by providing a non-dilutive financing solution to renewable energy generation and development companies. The company currently owns 86 royalties on solar, wind and hydro projects in Canada, Europe and the United States. The Company’s business objectives are to provide shareholders with a strong growing yield, robust capital protection, high rate of growth through re-investment and a sustainable investment focus.
Management believes it has identified an underserved segment in the renewable energy capital markets that lies between traditional debt and equity financing. For many small to medium‐sized renewable energy companies (“SMREs”), a revenue‐based royalty financing has many advantages with respect to flexibility, cost and contractual terms.
Traditional royalty‐based financing has been used extensively in the North American natural resource, consumer service, industrial manufacturing, health‐care, music and food sectors.
Recent Financial Results: (Q1 2020)
The Company recorded net income in two of the five fiscal quarters to March 31, 2020. There are significant seasonal variations in its royalty projects.
Net Debt/EBITDA EV EBITDA EV/EBITDA
Total revenues in 2019 were roughly $1.4 million – so the business remains small.
We have seen a couple royalty businesses essentially “blow-up” in the past, but they were lending to businesses that did not hold longer life, utility type assets. These type of assets may lend themselves more to this model. However, we do see the higher quality assets being able to raise capital at decent rates in the alternative power or green power market, so the question is whether RE Royalties is choosing from a pool of lower quality assets. It could be argued, they are partnering with just smaller assets of potentially high quality that offer
To grow, these types of businesses typically have to issue shares. We have already seen RE double its share count over the past year. This is something to monitor. It can be a tight rope that is difficult to walk – issuing shares and being able to generate significant enough return on the capital raised to create incremental cash flow per share – this ultimately drives the share price.
Again, we stated that last year’s revenues were $1.4 million, if the company continues to pay $0.01 in dividends each quarter, it will pay out over $1.25 million in 2020 – revenues will need to keep the upward trajectory seen in Q1.
The business is certainly interesting and in a segment of the market we see long-term potential growth. We are monitoring it and will be looking at the business in our upcoming Canadian Alternative & Green Energy Special Report. At present, we rate it as a Monitor.
Westport Fuel Systems Inc. (WPRT:TSX)
Current Price: $2.26
Market Cap: $278 Million
What does the company do?
Westport Fuel Systems, Inc. is a transportation technology company, which engages in the engineering, manufacture, and supply of alternative fuel systems and components.
Its fuel systems and components are for clean, low-carbon fuels, such as: natural gas, renewable natural gas, propane, and hydrogen to the global automotive industry.
The stock was hit hard by the Covid-19 pandemic earlier this year but is up over 24% in the past five trading days.
What is driving the stock?
COVID-19 has impacted Westport Fuel Systems quite drastically due to both the disruption of production and end customer demand. Its three primary production facilities in Northern Italy were shut down from March through May and the company does expect weaker customer demand for the remainder of 2020.
But in recent news the stock is being driven by a few news releases, where:
On July 24th the company announced that they secured a €15 million credit facility to improve its liquidity during the Covid-19 pandemic for working capital, payroll and potential investments and on July 23rd, the company also announced that they had received a US$10 million credit facility from Export Development Canada to additionally help with liquidity needs.
Q1, 2020 (In USD$)
- Revenue decreased 8%, to $67.2 million compared to the same quarter last year – caused by negative impacts of COVID-19 on commercial activity, particularly in Europe.
- Adjusted EBITDA decreased to negative ($3.6) million from a gain of $7.3 million for the same quarter last year. This change was primarily due to a large warranty charge.
- Basic Earnings per share (EPS) was a loss of ($0.11) compared to a loss of ($0.02) for Q1, 2019.
- TTM Adjusted EBITDA was $17.5 million
- TTM Revenue was $299.3 million compared to $279.9 million for the same four quarters last year.
Just a note here: the company will be releasing its second quarter results on Thursday, August 6th which we will certainly be digging into for further analysis.
Looking at the company’s balance sheet, they have a net debt position of of $46.4 million and a net debt-to-EBITDA multiple of 2.65x which is relatively attractive. However, if the company does use its most recent credit facilities to their full potential, this multiple will increase to over 4.2x which could be a cause for concern. We will certainly have to monitor the company’s debt going forward to see if it increases drastically.
Looking at the company’s relative valuation, based on Westport’s TTM Adjusted EBITDA of $17.5 million, the company has an Enterprise Value-to-EBITDA multiple of ~17.5x, which considering headwinds in the commercial sector along with its need for additional credit facilities I would say places the company trading at approximately fair value.
Westport Fuel is an innovative company that is providing cleaner Carbon fuels which we certainly see a demand for in the future and the industry definitely has some excitement around it right now. But seeing as the company expects further headwinds throughout 2020 and has been increasing its debt to deal with liquidity needs – we will continue to monitor the stock at this time.
We are actually coming out with a comprehensive report on profitable ESG stocks listed in Canada, so keep your eye for the release of that report which will likely include an update and further dive into Westport. With this being said, we will continue to monitor the stock and its recent share price performance has made it our Star of the Week.