KeyStone’s Your Stock Our Take is Tucows Inc. (TC:TSX) & Atlas Engineered Products Ltd. (AEP:TSX-V) & Our Star is Enercare Inc. (ECI:TSX)
This week, due to the volume of questions for our Your Stock, Our Take segment, we picked two stocks to look at Tucows Inc. (TC:TSX) and Atlas Engineered Products Ltd. (AEP:TSX-V). Tucows provides network access, domain names and other Internet services. The stock has been a tremendous “under the radar” success story jumping from the $9 range to $75 over the past 5-years. Is it a BUY, SELL, or HOLD? Atlas Engineered Products Ltd is a supplier of trusses and engineered wood products. Is it a BUY, SELL, or HOLD? Our Star of the week is Enercare Inc. (ECI:TSX), a provider of essential home and commercial services and energy solutions. The stock rocketed 53% on Wednesday, from $18.91 to $28.90 after it announced it would be acquired by Brookfield Infrastructure in a C$4.3 billion transaction. The stock has been a long-time holding in our Canadian Income Stock Research having been originally recommended in the $9.00 range.
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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.
Busy earnings week and this activity will continue for the balance of the month – we expect to be hard at work analysis the results and providing client updates. Three were released today, not the least of which being an update on the announced acquisition of Enercare by Brookfield Infrastructure which sent Enercare higher by 53% mid-week and pair up two excellent performers from our Canadian Income Stock Hybrid Portfolio – we will touch on this later.
We also saw an earnings beat by our most recent addition to our US research sending the Cyber Security firm higher by 14% on the day alone!
Your Stock, Our Take
Our Take on Tucows?
- Lloyd Smith, Via Twitter
Well Lloyd, I always say that Two Cows are better than 1….and terrible puns are just terrible puns.
Tucows Inc. (TC:TSX)
Current Price: $75.03
Market Cap: $795 million
What does the company do?
Tucows provides network access, domain names and other Internet services. Since 1994, the business has pivoted and grown from shareware to wholesale domain name registration to retail domain name registration to mobile phone service to symmetrical Gigabit Internet service via fiber-to-the-premises.
Operates as Ting Mobile, Ting Internet, enom, and Hover which makes it easy for individuals and small businesses to manage their domain names and email addresses.
Key Points:
Recent Quarterly Financials:
- Revenue for the first quarter ended March 31, 2018 was $95.8 million, an increase of 37.6% over the prior year period.
- Net income grew to $3.7 million in the first quarter of 2018, compared to $2.5 million in the first quarter of 2017.
- Adjusted EBITDA was $10.4 million in the first quarter of 2018, compared to $6.3 million in the first quarter of 2017.
Our Take:
KeyStats
P/E: 34.26x
P/EBITDA: 17.82x
Current Ratio: 0.84
D/E: 1.11
35x 2018e
25x 2019e
37% growth –
slow to 17% –
There is only one analyst following the stock at present, so the estimates hold a higher degree of risk.
The company reported strong revenue and earnings growth on its most recently released report in early May. However, much of this growth may have been from an accelerated recognition of domains revenue – which is more one-time in nature. Also, the acquisition of “eNom” and assets from “Otono Networks” gave the company a revenue bump for the quarter. The growth the company experienced was, for the most part, was not due to organic factors.
Tremendous success story over the last 5-years from the $9 range to $75 today.
Valuation wise it is likely close to fair value near-term, but we would not bet against the stock outperforming over the next 3-5 years. We would continue to HOLD long term.
Atlas Engineered Products Ltd. (AEP:TSX-V)
Current Price: $0.49
Market Cap: $5.7 million
What does the company do?
Atlas Engineered Products Ltd is a supplier of trusses and engineered wood products. It is engaged in manufacturing trusses for commercial and residential buildings and delivering to its customers on Vancouver Island and the Lower Mainland.
Key Points:
The stock is down 25% year-to-date. Since July 16th, however, it has risen 14% from $0.43 to $0.49. This appears to be in reaction to the company’s announcement about a definitive agreement to acquire Satellite Truss Ltd., a private company that designs and markets roof trusses and engineered floor joists.
Recent Quarterly Financials:
- Revenue for the first quarter ended Feb 28, 2018 was $2.1 million, an increase of 18.3% over the prior year period.
- Net income fell to a loss of $295,757 in the quarter, compared to a gain of $140,215 in the prior year period.
- Adjusted EBITDA fell about 60% to $83,830 in the quarter, compared to $222,782 in the prior year period.
From MD&A
The increase in revenues was a result of increased building activity on Vancouver Island and demand for Atlas products. At the same time, the company enhanced its capacity by adding a second production shift to handle the increased demand.
Our Take:
Earnings: negative
P/EBITDA: 9.61x
Current Ratio: 1.77
D/E: 0.73
While Atlas Engineered has experienced revenue growth from increased building activity, its earnings have fallen. EBITDA has fallen 60% and net income has fallen into losses over the last year, with quarterly losses in 3 of the last 4 quarters. This is contrast to the previous year, where the company did not experience any losses in any of its quarters. The current negative earnings position we see for Atlas makes it uninvestable at this stage from our fundamental perspective.
Weekly Star
Enercare Inc. (ECI:TSX) – the stock is a long-term holding in our Canadian Income Stock research having been originally recommended in the $9.00 range.
Current Price: $28.90
Market Cap: $3.10 billion
Star Performance:
The stock jumped 53% on Wednesday, from $18.91 to $28.90. Its previous high had been in May of last year when it reached $21.70.
What does the company do?
EnerCare Inc is a provider of essential home and commercial services and energy solutions. It mainly offers rental services of water heaters, water treatment, furnaces, air conditioners. The firm also engages in plumbing, and protection plans.
What is driving the stock?
Shortly before markets opened on August 1st, Enercare announced that it would be acquired by Brookfield Infrastructure in a C$4.3 billion transaction. Shareholders would receive C$29.00 per Enercare common share. This was at a 53% premium to the closing price the day before.
Financial Results
Enercare 2018 Q1 compared to 2017 Q1
- Revenue was $279.1 million compared to $248.7 million, up 12%.
- Net income was $4.9 million compared to a loss of $3.0 million
- On a diluted per share basis, $0.05 compared to a loss of $0.03
- Adjusted EBITDA of $58.7 million compared to $52.5 million, up 12%.
- On a diluted per-share basis, $0.55 compared to $0.49, up 12%.
Conclusion:
P/E: 48.17x
P/EBITDA: 10.43x
From a valuation perspective, we see the offer as fair for Enercare shareholders in the range of 14 times EV/EBITDA on a trailing basis. We do not see a competing bid in the offing at this time. It provides a great return and crystalizes excellent gains for clients who have owned Enercare since the original recommendation in February 2012 at $9.50.
Cash offer at $29.00 – Canadian residents have an additional option to receive, in lieu of cash, a transaction that will result in 0.5509 Brookfield units, up to a limit. Assuming the transaction does go forward, this stock has essentially become a derivative investment of Brookfield Infrastructure with downside protection. You have the option of converting to Brookfield shares, but if it looks unfavourable, you can take the $29.00.
The massive gains any shareholder of Enercare experienced overnight into August make it this week’s Star of the Week.
