Stock Talk Podcast Episode 154 Show Notes

KeyStone’s Stock Talk Podcast Episode 154

This week, we have one YSOT segment and, as promised, we will review a couple of unique profitable, small-cap names from our coverage that I detailed in a recent Money Talks interview.

Our YSOT this week came in from a listener on Peak Fintech Group Inc. (PKK:CSE), the parent company of a group of financial technology (or Fintech) subsidiaries operating primarily in commercial lending industry within China. With the company posting very strong revenue growth and breaking into adjusted profitability, a listener asks us our take on the stock.

The two companies we will be reviewing briefly today from our coverage are Dynacor Gold (DNG:TSX) and Premier Health of America (PHA:TSX-V). Dynacor is a dividend-paying industrial gold ore processor operating in Peru. The corporation is engaged in gold production through the processing of ore purchased from artisanal and small-scale miners. Premier Health uses its proprietary PS web platform to lead the healthcare services sector digital transformation by providing a comprehensive range of outsourced services solutions centered around staffing for healthcare needs to governments, corporations, and individuals.

Topics:

US Mid-Cap Tech Valuations Concerning:

We are watching some tech names closely. Valuations in the cohort are concerning. While we see concerns with big tech valuations, we continue to be very happy with our holdings in Alphabet (GOOG:NASDAQ), Microsoft (MSFT:NASDAQ), and Cybersecurity giant Fortinet (FTNT:NASDAQ) and continue to like all those names long-term. We have concerns with some of the lesser-known names with $5-$50 billion market caps that produce revenue growth, but zero cash flow and will be really vulnerable in a correction. While the 3 big-tech names above are not cheap, we maintain a buy on Alphabet for example which trades at just over 30 times earnings – earnings which will grow 55% this year. We are concerned with the valuations of some mid-cap lesser know names – avoiding most at this stage.

We do not do this often let’s get to it before I change my mind. We are not going to delve into our full research in each stock – I say that not for the listeners’ sake, but because Brennan is with me and he would love to talk for the next 5 hours about each of these stocks – but our audience actually has lives and just need a quick summary. Of course, I kid, a great thing about Brennan as an analyst is that he loves to dive into these businesses – it may be the only good thing about him ladies, but at least he has that! It is more than we can say for Aaron!

– we save that deeper dive for client reports, chat sessions and updates. We will take a brief look at two of the names today. The third, Next Green Wave, just reported a weaker-than-expected quarter which faced some one-time issues that should be corrected going forward, but we are actively updating clients on this.

Let’s get to that first stock.

HealthTech related stock was hot as heck earlier this year – anything to do with telehealth and the digitization of healthcare services surged, many getting ways ahead of their underlying fundamentals – there has been a pullback – which is an opportunity –  one basically unknown name (literally no analyst coverage) is…

1)  Premier Health of America Inc. (PHA:TSX-V)

Price: $1.28

Market Cap: $69 Million

What Does the Company Do?

The company’s PSweb platform is an end-to-end customer relationship a platform that automates the healthcare staffing industry’s business processes – the company’s healthcare professionals can use their integrated iPhone and Android mobile applications to interact in real-time and manage their work schedule – efficiently connecting nurses (for example) with specific work shifts in seconds, every day..a bit like Uber matches drivers with rides, but in a more closed environment.

A strong presence in Quebec and Nunavut and is gradually rolling out its platform in the northern regions of Alberta, Manitoba, and Ontario.

Strong Profitable Growth in Q3 2021:

• Revenues jumped 238% to $18.6 million from $5.51 million in Q3 2020 – attributable to the consolidation of the Code Bleu and Solution Nursing acquisitions as well as organic growth.
• The decrease in the average gross margin for the quarter to 24.0% (versus 27% in Q3 2020 and 25% in Q2 2021) resulted from a reclassification of travel expenses in the Nordik division. Target going forward is a gross margin of 25%.
• EBITDA rose 140% to $1.3 million from $544,995 in Q2 2020.
• Net income was $0.6 million up from $0.39 million in Q3 2020 ($2.2 million for the 9-month period compared to ($0.2 million) for the same period in 2020).
• Premier Health started its non-ambulatory transport services in June.

Funding Growth: On August 30, 2021, Premier announced it had negotiated the provision of two senior secured credit facilities via Royal Bank of Canada for a total amount of up to $27 million.

Valuations:

Reasonable multiple of approximately 12 times trailing EBITDA.

By applying and EV/EBITDA multiple of  14, we arrive at a near-term fair value of $1.45. Without factoring in further acquisitions over the next 12-months (despite the fact we expect 1-4 accretive acquisitions) we expect Premier Health to conservatively deliver $7.4 million in EBITDA. By applying an EV/EBITDA multiple of 14 we arrive at a mid-term fair value of roughly $1.85. 40% under mid-term fair value.

Upside on this as management executes on its planned move to the Ontario market.

The stock is thinly traded and there is zero need to jump all over it. In fact, barring an acquisition near-term, there are likely limited news catalysts till the company releases its Q4 and Fiscal year-end results in mid-December – do not rush in. It might be had for a lower price. We look 1-3 years forward on the business.

The original client recommendation price at the start of 2021 was $0.84.

Gold stocks largely predicted to do well in an inflationary environment have actually performed poorly this year and worse over the last 12-months. The junior gold heavy TSX Venture index is down 21% from its February highs. Not the case for Dynacor – a gold miller we recommended at the World Outlook this year…actually increased 56% since February. Why?

They are a miller, not a miner and the relatively high price of gold incentivizes small-scale miners in Peru to bring their mill more and more ore. The more ore, the more money Dynacor makes, and they are having a record year.

3) Dynacor Gold Mines Inc. (DNG:TSX)

2021 Outlook Recommendation: $1.83

Today’s Price: $2.64 – today $2.85

Return: 56% (+ Dividend 3%)

Catalyst: 1) Issued strong growth guidance for 2021 which it just increased – the company will issue full updated guidance this month  – another positive. Dynacor had forecasted gold and silver revenues will jump 47% to US$150 million for 2021. Cash flow will more than double. 2) Announced a 43% expansion of their highly profitable gold mill in Peru – online and producing at capacity already.

Strong growth, strong dividend, and strong balance sheet.

We estimate Dynacor is positioned to post US$0.22 per share in 2021. Based on a justified multiple of 11 times and after adding back the net cash of approximately US$0.32 per share, we arrive at a fair value in the range of $3.50.

25% undervalued at present – the stock has already produced a 56% gain since February. If sentiment turns more positive on gold stock, Dynacor can perform better. We do caution that there is high geopolitical risk in Peru, particularly considering the recent change in the governing party. The company is also planning to build out a JV mill (similar to its Peru operations – smaller scale to start) in Senegal for diversification purposes. Plans are in place – COVID restrictions are preventing further progress, but we expect positive news on this front as countries open up over the next year.

Your Stock Our Take

Via Justin on Twitter – “Peak Fintech is doing great things in China right now and soon to be in North America, Nasdaq listing coming before the end of August, along with many other things”.

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Peak Fintech Group Inc. (PKK:CSE)

Current Price: $11.69

Market Cap: $1 Billion

What does the company do?

Peak Fintech Group is a commercial lending company, which lends money to small and micro businesses in China. The company through its Cubeler Lending Hub ecosystem automates the process by which lenders find and qualify borrowers across several market verticals.

Key Points:

• On July 7th the company closed a $54 million equity raise which will help support the company’s expansion into North America. And then subsequently to the raise, it completed a share consolidation to position itself to list on the NASDAQ. This reduced its share count from 161M shares to about 80.5 million.
• July 29th Peak announced acquiring a minority stake in China UnionPay subsidiary Rongbang Technology, to provide fund transfer and payment settlement services.
• On August 3rd the company announced the launch of a steel trading platform as part of its business hub ecosystem. – (interesting they are expanding their services of trading/commodity/logistics)
• On August 16th, Peak announced the acquisition of Cubeler Inc., an analytics and AI company located in Montreal which owns the world-wide commercial rights to the technology at the core of Peak’s business hub. The transaction was $1 million in cash and 11.13 million common shares.
• The company’s Q2, 2021, results were the first time the business has ever recorded a net profit.

Recent Financial Results: (Q2, 2021)

Revenue was up 320%, to $30.6 million compared to the same quarter last year. The increase was due to increasing demand for its supply-chain services, where it provides material suppliers, factories, product distributors and retailers an all-encompassing service that includes product sourcing, financing, and logistics.

• Adjusted EBITDA was a gain of $1 million, compared to a gain of just $170 thousand million for Q2 last year.
• Net Profit was just slightly into the green at $290 thousand.
• Balance sheet – On June 30, 2021, it had net cash of $1.8 million.
• In late July, Peak Fintech released Revenue and Adjusted EBITDA guidance for 2021, 2022, and 2023. (They expect to adjust this guidance upwards to reflect North American expansion once the Cubeler acquisition is completed)

To put this into perspective – CURO Group Holdings (CURO:NYSE), another lender operating in the U.S. and Canada is trading with a trailing EV/Adjusted EBITDA multiple of 8.0x.

Our Take:

Peak’s Lending and Logistics Hub ecosystem appears to be a very useful fintech tool and its recent growth in revenue and projected financial guidance looks promising. The company is positioning itself to list on the NASDAQ with its recent share consolidation (which should be coming shortly) and will begin rolling out its services across North America after the acquisition of Cubeler. Plus, once this acquisition is completed, I think it will be interesting to see how much Peak revises their revenue and Adj. EBITDA guidance.

In my opinion, if you believe that the company can achieve their fiscal 2022 guidance of $59 million – considering they are trading at approximately 17x EV/EBITDA – I do not think that the business is trading at unreasonable multiples. But keep in mind the additional risk involved with a company that operates in China, which is likely priced into its multiples making it appear more attractive. Plus, there are no guarantees whether they will in fact meet this guidance.

Overall, I think it is a very interesting story, especially considering the company recently broke into profit and has the nice catalyst of expansion into North America. I think for an investor with an increased appetite for risk, there could possibly be some value here if the company can achieve its financial guidance. But right now, we will continue to monitor the company’s progress and see if they are on the right track to achieve their guidance.

The growth revenue growth looks great and the progress toward profitability is great – although adjusted EBITDA margin was just 4% in the last quarter. (trailing valuations are very high). EV/EBITDA of 17 – based on ‘projected” EBITDA in the range of $30 plus million – remember only $1.2 million in the last quarter.

Hard to find reliable direct comparable – while not a direct comparable but we can compare it to a Canadian-based financial services firm to look at valuations. GoEasy (GSY:TSX) – which as been a recommendation of KeyStone’s since mid-2019 when the shares traded at $49 – today they trade at: $200.00. goeasy Ltd. provides loans and other financial services to consumers in Canada. It also leases household products to consumers. The company operates through two segments, Easyfinancial and Easyhome.

GoEasy Trades at 16 times next year’s expected earnings – that is earnings, not EBITDA. So a lower multiple than Peak in a less risky market.

It is not a slow-growth business.

In its’ second quarter:

• Loan Portfolio of $1.80 billion, up 58%.
• Revenue of $202 million, up 34%.
• Net Charge Off Rate of 8.2%, down from 10.0%.
• Adjusted Quarterly Net Income of $43.7 million, up 50%.
• Adjusted Quarterly Diluted Earnings per Share of $2.61, up 38%.

The other item I would caution on with China-based publicly listed companies is the China risk factor – it has be highlighted by huge drops in some of the best-known Chinese companies over the past number of months including global businesses in Alibaba, Tencent, and JD.com. Regulatory risk and just the risk of an unpredictable Chinese government is high.

I am very surprised that this heightened risk has not affected Peak Fintech – in fact – the big gains in the stock have come over a summer where the China risk has heightened.

Finally, I will say this – while Brennen is too young to remember (although he has seen the movie the China Hustle, so he has some reference point), but a number of points in the past have seen China-based North American-listed stocks hit by accounting and fraud-related charges. We see the ability of audit firms to do the work necessary to provide the checks and balances on China-based firms to be impaired. For this reason, China-based, US listed companies have rightfully traded at a significant discount to North American peers. I am sure if we can say that for Peak Fintech. Something to consider.

Potential, but well above average risk.