KeyStone’s Your Stock Our Take is Macro Enterprises (MCR:TSX), Our Star is Canada Goose Holdings Inc. (GOOS:TSX), Dog is Polaris Infrastructure Inc. (PIF:TSX)
This week in our Your Stock, Our Take segment we look at Macro Enterprises (MCR:TSX), which executed a construction contract on TransCanada’s Coastal GasLink Pipeline Project. The proposed pipeline will deliver natural gas from the Dawson Creek area of northern B.C. to a facility near Kitimat, B.C., where it will be converted to a liquid form for export by LNG Canada. Estimated contract value in excess of CND$900 million with approximately Macro ($360 million) going to Macro over a 3-year period if it moves forward. Is it a BUY, SELL, or HOLD – we’ll tell you. Our Star of the week is Canada Goose Holdings Inc. (GOOS:TSX), designs, manufactures, distributes and sells premium outerwear for men, women and children – think goose down parkas. The stock jumped as much as 49% this week after the company reported record annual results and a positive outlook. Finally, our Dog of the week is Polaris Infrastructure Inc. (PIF:TSX), which owns and operates a 72-megawatt capacity geothermal facility in northwest Nicaragua. The stock dropped 22% this month as the situation in Nicaragua, worsens – the country appears to be in the throes of a mass uprising against Ortega’s regime. Is it a Dog or an opportunity?
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Now, let’s dig into the show.
I welcome back my co-host, KeyStone’s VP and Senior Analyst, Aaron Dunn.
Your Stock, Our Take
Arnie in Mississauga – I noticed Macro Enterprises, the pipeline company, signed a huge contract this week with the TransCanada lead Coastal GasLink. What is your take on the stock?
Macro Enterprises (MCR:TSX)
Current Price: $3.00
Market Cap: $91 million
What does the company do?
Macro Enterprises is a Canada-based oil and gas company. It provides pipeline and facilities construction and maintenance services to companies in the oil and gas industry in western Canada.
Recent Significant News
On June 19th, Macro Enterprises announced that its Joint Venture with Spiecapag Canada Corp. had executed a construction contract with Coastal GasLink Pipeline Limited Partnership on the Coastal GasLink Pipeline Project. The proposed pipeline will deliver natural gas from the Dawson Creek area of northern B.C. to a facility near Kitimat, B.C., where it will be converted to a liquid form for export by LNG Canada.
- Estimated contract value in excess of CND$900 million split 40/60 between Macro ($360 million) and Spiecapag.
- Final Investment Decision expected to be received by Q4 2018 with full notice to proceed issued shortly after – while it is expected to move forward, there remains risk.
- Current in-service date for the pipeline is scheduled for Q4 2021.
Recent Quarterly Financials:
The company has a pristine balance sheet with around $33 million or $1.10 per share in net cash and no debt.
The last quarter was not strong.
Q2 2018
- Revenue was down 31% to $8.8 million from $12.7 million.
- Net loss was down slightly to $2.3 million compared to $2.6 million
- Adjusted EBITDA of -$1.3 million (negative) compared to -$1.7 million (negative).
The company’s results have been lumpy over the past 8-quarters as it awaited new contract work – posting 5 quarters of positive EBITDA and 3 quarters of negative EBITDA.
Our Take:
We know management and they definitely know this segment and are good operators. Like we said, the balance sheet is pristine. The trailing earnings and cash flow picture has not been lumpy with more negative than positives over the last 8 quarters.
The stock is high risk, but if the Coastal Gaslink project moves forward as it appears it will, the potential for return to significant growth over the next 3+ years is real. The near-term earnings prospect remain subdued – in fact, management has stated Macro’s first half 2018 revenues are expected to be challenging and significantly lower than last year.
Macro was also selected in a 50/50 joint venture with Spiecapag Canada Corp. for $375 million pipeline construction work on the Trans Mountain Expansion Project which the Federals Government in their infinite wisdom has now agreed to pay $4.5 billion to purchase – near-term there is uncertainty here, but Macro could also benefit from substantial work on this project when it commences.
If both these projects proceed as contemplated, Macro is well positioned to profit from them – if you believe in the projects, the stock offers speculative value. We will wait for further confirmation they are moving forward.
Weekly Star
Canada Goose Holdings Inc. (GOOS:TSX)
Current Price: $12.81
The stock jumped as much as 49% this week from the $60 range to just under $90 before settling in the $76.60 range, up 27% for the week after reporting record Q4 and 2017 annual results.
What Does it Do?
Canada Goose designs, manufactures, distributes and sells premium outerwear for men, women and children – think goose down parkas. Its products are sold through select outdoor, luxury and online retailers and distributors.
Financial Results
2017 Annual
- Annual Revenue was $591.2 million compared to $403.8 million, up 46%.
- Annual Net Income was $96.1 million compared to $21.6 million, up 344%
- On a diluted per share basis, $0.86 compared to $0.21, up 310%.
- Annual Adjusted Net Income was $94.1 million compared to $44.1 million, up 113%.
- On a diluted per share basis, $0.88 compared to $0.44, up 100%.
- Annual Adjusted EBITDA of $149.2 million compared to $81.0 million, up 84%.
- On a diluted per-share basis, $1.40 compared to $0.81, up 73%.
Q4 2017
- Revenue was $124.8 million compared to $51.1 million, up 144%
- Net Income was $8.1 million compared to a loss of $23.4 million.
- On a diluted per-share basis, $0.07 compared to a loss of $0.23.
- Adjusted Net Income was $9.9 million compared to a loss of $14.7 million.
- On a diluted per-share basis, $0.09 compared to a loss of $0.15
- Adjusted EBITDA of $21.7 million compared to a loss of $11.4 million.
- On a diluted per-share basis, $0.20 compared to a loss of $0.12
Outlook
Over the next three fiscal years, the company currently expects the following:
- Average annual revenue growth of at least 20%
- Annual adjusted EBITDA margin of at least 26% in fiscal 2021
- Average annual growth in adjusted net income per diluted share of at least 25%
Great growth but with the current market multiples the stock is trading at management better at the very minimum deliver on these goals and we would hope they handsomely beat the targets to sustain current multiples.
Balance Sheet as of March 31st
- Current Ratio: 2.25 (current assets $301.0 million)
- $182.0 million in Intangible Assets and Goodwill out of $548.4 million Total Assets (33%)
- D/E: 0.56
The company trades at a PE in the range of 100 and with a price to EBITDA on a trailing basis of 64. If it keeps growing cash flow at 50-100%, these multiples, although lofty, still look attractive – but this is unrealistic.
We like the product and the growth but not the current valuations.
We note that yesterday, Canada Goose announced that certain of its shareholders, including certain of its executive officers and directors, intend to offer for sale 10,000,000 subordinate voting shares – the stock dropped back over 7% on this news. Generally, we do not like dual share structures and typically companies issue shares when they feel the share price has gone beyond fair value near-term – we think this is the case.
Nevertheless, the gains this week make it our Star!
Dog of the Week
- Our dog of the week is Polaris Infrastructure; trades on the TSX for about $14.50 per share.
- The stock is up a little bit today but it has trended down steadily since April when it hit a peak price of just over $20.00.
- This isn’t a company that I directly cover but I have been asked about it a lot by clients in the past.
- They are renewable power producer and own and operate a single geothermal facility in Nicaragua.
- The recent downtrend in the share price isn’t related to the company’s financial performance which has been steady.
- One of the thing I like about Polaris is that it does produce a lot of cash flow, pays a nice dividend and trades at a discount relative to other renewable stocks listed on North American exchanges.
- Right now the company pays a yield of 5.5% which is well covered.
- They’ve reported about $35 million in operating cash flow over the last year so right now it’s trading at about 6 to 7 times cash flow.
- Revenue is generated under a long-term contract with the Nicaraguan government which runs until 2029 and revenue and cash flow have been increasing in recent years as the company adds new geothermal wells to its present facility.
- But in spite of some good fundamentals, Polaris has lost about 25% of its value since April.
- So why is this?
- Well the reason essentially boils down to the political climate in Nicaragua.
- There were massive protests against the government in April which lead to the death of about 40 people.
- In response to the protests, the government backed down on some measure they were taking with respect to social security.
- This seems to have calmed things down in the near term but the general sense is that there is growing social unrest in Nicaragua and dissent against the country’s current President Daniel Ortega.
- Really this has just created uncertainty for Polaris and the market hates uncertainty.
- This is the basis of my main complaint against the company in the past.
- It is really a one trick pony in that it only operates a single asset in a jurisdiction which could at some point become unstable.
- Ultimately I think it is a good company but it is higher risk and I’ve advised clients that if they want to own it they should look to hold a relatively small position.
- It is cheaply valued compared to peers but there is a good reason for that as well.
- Like I said, financially the company looks healthy now.
- Things may starts to improve the stock going forward depending on what happens in Nicaragua but for now it is our dog of the week.
