KeyStone’s Stock Talk Podcast Episode 151
This week, coming off a quick vacation and some overnight Olympic viewings, Ryan is itching to get back at it.
We have two YSOT segments for you. The first is on WELL Health Technologies Corp. (WELL:TSX), an omnichannel digital health company focused on empowering doctors to provide the best and most advanced care possible, while leveraging the latest trends in digital health. WELL has been highly acquisitive and recently closed another significant acquisition. A listener asks us if the recent pullback is an opportunity.
Our second YSOT came from a listener on Tree Island Steel (TSL:TSX), which operates in the steel business and is primarily engaged in the manufacturing and sale of steel wire and related products for a diverse range of industrial, residential construction, commercial construction, and agricultural applications. Tree Island is a lightly traded microcap that has shown life in 2021 after a decade of moving sideways to down. A listener asks us our take on this little followed company.
Finally, our Dog of the Week is a once high-flying but highly speculative micro-cap that we have warned listeners against purchasing on at least 2 previous shows – Sona Nanotech Inc. (SONA:CSE). After briefly rocketing to highs in the $16 range in 2020 on pure speculation, the company’s shares have cratered to $0.35. A listener asks us if the shares have any value after its massive drop.
YSOT #1
WELL Health Technologies Corp. (WELL:TSX)
Price: $7.54
Market Cap: $1.6 Billion
What Does Well Health Do?
WELL is an omnichannel digital health company focused on empowering doctors to provide the best and most advanced care possible, while leveraging the latest trends in digital health. Clients will know Well Health as the company that acquired a past recommendation CRH Medical and helped us turn a profit on that investment.
While the stock has pulled back of late, it has performed tremendously well over the past 3 years and has a skilled capital allocation team at the helm who have grown businesses and exited at a significant profit in the past.
Recent Acquisition:
WELL recently acquired MyHealth’s 48 clinics across Ontario, and became the largest owner-operator of outpatient medical clinics in Canada with 74 in total. I would expect that number to continue to grow given both WELL and MyHealth’s active M&A strategies, with MyHealth, in particular, having an active pipeline of over 125 targets. CRH Medical further augments a strong M&A picture. To fund further acquisitions, WELL should have access to over $300 million in capital, including capital from the closing of $200 million in senior credit facilities ($140 million committed plus a $60 million accordion) used to help fund the MyHealth acquisition.
Good growth outlook – but let’s look at valuations.
Valuations:
WELL’s EV/2021 eEBITDA is in the range of 30 times which is high. This drops to the range of 17.5 times 2022 eEBITDA – more attractive.
While I do not love using an Enterprise Value to Revenue metric – because many of its peers are light on profitability in terms of comparisons – we can take a quick look at well from this perspective. WELL is trading at 4.2x EV/Revenue (C2022E), slightly above its Primary Care/OmniChannel peers (3.6x), at a significant discount to its Telehealth peers (7.5x) and Healthcare Technology peers (10.9x), and at a premium to the average of its Healthcare Services peers (1.8x). WELL does not fit perfectly into any of these boxes given the fact it is a mix of telehealth and traditional clinics – but its valuation is not “off the charts”. But we are seeing a contraction in valuations in the sector generally after sky high multiples earlier this year.
Conclusion:
For share price growth to continue long-term, management will have to continue to execute – skillfully walking the line between dilution and creating cash flow on a per share basis. It can be a difficult path to chart, but WELL has a team that has done it in the past. We see the company as intriguing and a bet on management longer term. Growth will have to continue. If it can, WELL may be an option. It will be volatile.
YSOT #2
Our second YSOT came from a listener on Tree Island Steel (TSL:TSX), which produces wire products for a diverse range of industrial, residential construction, commercial construction and agricultural applications. Tree Island is a lightly traded micro cap which has shown life in 2021 after a decade of moving sideways to down. A listener asks us our take on this little followed company.
Tree Island Steel Ltd. (TSL:TSX)
Current Price: $4.07
Market Cap: $116 million
Dividend Yield: 2.5%
What does the company do?
Tree Island Steel operates in the steel business and is primarily engaged in the manufacturing and sale of steel wire and related products for a range of applications. Some of its products include bulk nails, stucco reinforcing products, concrete reinforcing mesh, fencing, and other fabricated wire products.
Key Points:
- The company announced a one-time special cash dividend of $0.05 per share payable on October 15, 2021. This special dividend is in addition to the company’s regular quarterly cash dividend of $0.03 per share that is also scheduled to be paid on October 15, 2021.
Recent Financial Results (Q2, 2021)
- Revenue increased 47% to $74.4 million compared to the same period last year.
- Revenue growth was due to higher demand with the economy reopening and because of increased selling prices across all market segments.
- Net Income for the Quarter increased substantially from last year to approximately $9.1 million.
- Adjusted EBITDA grew over 260% to $14.7 million from $4.0 million for the same period last year.
- Management indicated that both the increase in Adjusted EBITDA and Net Income was influenced by the elevated pricing along with ongoing inventory and cost management across the business. But as the steel supply chain rebuilds inventory and the availability of products improves, we anticipate more balanced market conditions in the future.
- So, does this mean that this elevated profitability is one-off? Or will it be ongoing for some time? It would be good to interview management to get a better feel for the sustainability of this profit.
- Balance sheet – Net debt of $74 million and a net debt-to-EBITDA multiple of ~2.6 times.
- Trailing EV/EBITDA of 6.6 times – which is reasonable in my opinion and possibly trading near or under fair value – that is if growth like this can continue.
Conclusion:
To conclude, Tree Island Steel appears reasonably attractive. Although lumpy, the company has been growing revenue and profitability, has a nice yield, reasonable valuation, and reasonably healthy balance sheet.
What one must keep in mind here is that we have two forces at play, the first is increasing demand from the economy reopening, and the second is the increase in Steel prices, which are up over 200% from the same period last year and this increase in steel prices is essentially what has helped the company increase its profitability margins substantially.
Generally speaking, if someone thought that the price of steel was going to continue to increase, I think that it could be a decent option to gain exposure to this underlying trade or investment thesis. But long-term, there is definitley some uncertainty. Such as if steel prices turn and demand for steel begins to slow in the economy, we will see the oppositive effect happen with revenue and margins declining and subsequently the stock performing poorly. So realistically it’s a tough call. Fundamentally the business is performing well as of recent, but some speculative aspects that would keep us hesitant from recommending the business to clients.
What has changed in the last couple of quarters to increase revenue growth and profitability – if the growth and profitability increase is sustainable or a near-term bump. If sustainable Tree Island looks great. If it is a near-term bump due to steel price increases or pent-up demand.
We do not expect steel prices to continue to increase at the current pace.
Finally, our Dog of the Week is a once high-flying and highly speculative micro-cap which we have warned listeners against purchasing on at least 2 previous shows – Sona Nanotech Inc. (SONA:CSE). After briefly rocketing to highs in the $14 range in 2020 on pure speculation, the company’s shares have cratered to $0.35. A listener ask us if the shares have any value after its massive drop.
Sona Nanotech Inc. (SONA.CN)
Canadian Sec – Canadian Sec Real Time Price. Currency in CAD
$22 million market cap.
Dog of the Week/Month/Year
Sona Nanotech Inc. (SONA:CSE)
Current Price: $0.35
Market Cap: $22.0 million
What does the company do?
Sona Nanotech Inc. is in the Life Sciences Industry with the primary objective to develop and produce its own lateral flow rapid COVID-19 antigen tests utilizing Sona’s gold nanotechnology, which is supposed to increase performance and reduce the time to market.
This is actually the third time we have covered SONA on the podcast now. The first time was in mid-2020 when the stock traded around $2.50 and then later in December 2020 after the stock soared to highs of $16.00 and then had retraced back to just $1.00 per share.
Both times we covered the stock we highlighted it as highly speculative, and not a company with investment merit. And following these statements we got quite a bit of criticism online with people saying we didn’t understand the technology and how it was going to be revolutionary. And what I would say to those people who made these comments is that they were right in the fact that we are financial analysts, not scientists. So, we cannot pretend to understand the technology that was supposed to be ground-breaking and come to the conclusion that its test would pass approval and be revolutionary for fighting Covid-19 – which was why we aired on the side of caution considering the company had yet to produce any revenue and traded with a market cap of over $100M at the time.
Key Points (which recently made it a dog again):
- On June 11, 2021, the company announced it was discontinuing its previously announced clinical trial of its COVID-19 rapid, antigen saliva test due to inadequate test sensitivity with clinical saliva samples.
- David Regan, CEO, Sona Nanotech said, “We are surprised that our clinical trial did not show a corresponding level of sensitivity to our laboratory studies which showed that our saliva test was able to detect gamma irradiated COVID-19 virus at clinically relevant levels.” Furthermore, he said “We look forward to continuing further bold pursuits in new applications that leverage both our proprietary gold nanorod technology and the considerable base of experience afforded to us by our COVID-19 test development program.”
- And just to note, some of these tangents for its nanorod technology include: Point of Care Diagnostics, Drug Delivery, Photothermal Therapy, and Cell Imaging. But again, we come back to our initial point, we have no idea if Sona’s proposed technology will indeed be effective for any of these areas.
Recent Financial Results (Q2, 2021)
- No revenue, and a loss of over $3 million dollars. And the company has about $500K in net cash, so we could reasonably expect that they will have to issue more shares in the coming quarters to keep the lights on and pursue new potential opportunities.
Conclusion
I think this one is very straight forward. The stock was built completely around the premise that its rapid Covid-19 test would work and be brought to market. Leading to Sona, which had no revenue, to trade with a market cap of over $700M at its peak.
If a trader was able to get a quick flip out of the stock, I would like to congratulate them. But overall, timing on when to get in, or out of a stock like this would have been near impossible.
As our listeners know, we are not traders and want to see a company grow long-term. Hundreds of investors placed their money in SONA at elevated prices, and we’re left holding the bag, only to have their initial investment worth nothing. We even had an individual on Youtube ask if there was still hope for the stock to rebound to the pricey levels that they had bought at, but all we could say is that it was far from a stock that we would recommend to clients to HOLD.
