KeyStone’s Stock Talk Podcast Episode 55– Summary

 

KeyStone’s Your Stock Our Take: Constellation Software Inc. (CSU:TSX), Star: DIRTT Environmental Solutions Ltd. (DRT:TSX), Dog: Guyana Goldfields Inc. (GUY:TSX).

 

This week in our Your Stock, Our Take segment we look at Constellation Software Inc. (CSU:TSX), which is engaged primarily in the development, installation, and customization of software relating to the public and private sectors. Constellation Software is a well-run company in a Canadian tech sector that lacks big name power and any real breadth of companies – frankly, it is too small. A listener asks if it is a buy on the recent pullback? Our Star of the week is DIRTT Environmental Solutions Ltd. (DRT:TSX), a technology-driven manufacturer of highly customized interiors. The stock jumped 18% in one day this week after record Q3 results. Finally, our Dog of the week is Guyana Goldfields Inc. (GUY:TSX), engaged in the investment, acquisition, exploration, development and operation of mineral property interests, principally gold resource properties in Guyana, South America. The stock was down 43% on the week after the company revised production guidance for 2018 lower – it has cratered 63% year-to-date in 2018. Is it a Dog or an opportunity?

 

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Now, let’s dig into the show.

 

Your Stock, Our Take

 

Constellation Software has pulled back recently. I like the long-term track record. What are your thoughts on valuations as present?

 

William Battle, Cold Lake, AB

 

Constellation Software Inc. (CSU:TSX)

 

Current Price: $901.12

Market Cap: $19.096 billion

 

What does the company do?

 

Founded in 1995 and is headquartered in Toronto, Canada, Constellation Software is is engaged primarily in the development, installation, and customization of software relating to the public and private sectors. It also provides related professional services and support.

 

Key Points:

 

Starting from the beginning of 2018 right up until mid-July, the company experienced strong steady appreciation in share price as it performed a series of acquisitions including IN2 Group, Acceo Solutions, the ProArc Technical Document Management unit from Tieto Oyj, and Real Estate Digital. The stock gained traction in April, when the company’s quarterly results were released to an approving market. By July 19th the stock had risen 47% year-to-date.

 

This was followed by an earnings report released July 26th, which was followed by the stock dropping 10% in one day. Since then, the stock has depreciated further, down 17% since the July 26th earnings report. Despite this, the company is still up 14% year-to-date.

 

Recent Quarterly Financials:

 

  • Revenue for the third quarter ended September 30, 2018 was $759.1 million, an increase of 19% over the prior year period.
  • Net income grew to $65.7 million in the third quarter of 2018, compared to $54.3 million in the third quarter of 2017, up 21%.
  • Adjusted EBITDA was $196.6 million in the third quarter of 2018, compared to $161.6 million in the third quarter of 2017, up 22%.

 

Our Take:

P/E: 69.10x

P/EBBITDA: 27.09x

Current Ratio: 0.81

Intangible assets are 55% of Total Assets

D/E: 0.56

 

Constellation Software is a well-run Canadian company is a tech sector that lacks big name power and any real breadth of companies – frankly, it is too small.

 

CEO Mark Leonard continues to work his butt off and deliver growth – not organic, but via acquisition, which is a very hard thing to do.  Each day he wakes up and looks for good software companies to buy at reasonable prices and has refused to pay a nickel more than he absolutely has to. These companies are then added to Constellation’s ever-growing portfolio, where other cost efficiencies are squeezed out of them to maximize profits.

 

Today, Constellation boasts $19 billion market cap and it recorded nearly US$3 billion in revenue in its last four quarters.

 

When reporting its earnings, management asks we focus on adjusted earnings which removes non-cash items, the largest being the amortization of intangible assets – we can agree with this for this type of growth-by-acquisition business.

 

Constellations currently trades at 33 times adjusted earnings estimates for 2018 and 28 times 2019 estimates.  With a 19% growth rate expected. We see this as fair value at present. Over the near-term (or the next 6-months) we do not see outperformance. If we looked 2-5 years forward, we would bet on this management team outperforming and see it as an option in the barren Canadian tech landscape.

 

 

 

 

Weekly Star

 

DIRTT Environmental Solutions Ltd. (DRT:TSX)

 

Current Price: $7.00

Market Cap: $591.706 Million

 

Star Performance:

 

Stock jumped over 17% Wednesday after reported record Q3 2018 financial results and reiterating strong guidance for Q4 2018.

 

What does the company do?

 

Founded in 2005, DIRTT (Doing It Right This Time) is a technology-driven manufacturer of highly customized interiors. The company combines innovative product design with leading, proprietary software, including virtual reality, to maximize customer satisfaction throughout the entire lifespan of a project with a better way to build.

 

DIRTT designs, manufactures, and installs customized prefabricated interiors. The company combines its proprietary 3D design, configuration, and manufacturing software with integrated in-house manufacturing of its prefabricated interior construction solutions and its distribution partner network.

 

What is driving the stock?

 

Record Q3 Financial Performance

 

  • Revenue increased, respectively, by 0% to $96.6 million, and by $38.9 million or 17.8% to $258.0 million for the third quarter and year-to-date periods of 2018, compared to the same periods of 2017, reflecting increased sales activity in Canada and the US, including continued penetration into the healthcare market;
  • Adjusted Gross Profit Percentage increased respectively to 45.5% (2017 – 44.8%) and 44.9% (2017 – 43.9%) in the third quarter and year-to-date periods of 2018, reflecting increased leverage on fixed manufacturing costs, partially offset by higher materials and direct labor costs primarily due to product mix;
  • Adjusted EBITDA increased respectively by 65.2% to $17.8 million and7% to $38.7 million in the third quarter and year-to-date periods of 2018 over the same periods of 2017, due to increased sales activity and gross profit margins in both periods, with no corresponding increase in Adjusted SG&A;
  • Adjusted EBITDA Percentage increased respectively to 18.4% (2017 – 12.8%) and 15.0% (2017 – 7.7%) in the third quarter and year-to-date periods of 2018

 

Conclusion:

P/E (TTM)n/a
EV/EBITDA (TTM):14.42
P/S (TTM):1.77
P/FCFn/a
P/B:3.54
Current Ratio:2.67
D/E:0.06

 

DIRTT posted strong results in its third quarter. Adjusted EBITDA increased to $17.8 million, or 18.4%, of revenues, demonstrating the leverage possible in the business within the manufacturing, sales and administrative activities. While DIRTT’s revenues remain subject to inter-quarter volatility, the second half of the year has historically been the strongest, with 2018 being no different. The company remains on track to achieve its stated adjusted EBITDA percentage target of between 13% and 15% for 2018 – giving it relatively reasonable valuations despite the jump in share price.

 

That jump shows DIRTT is at least “Doing it Right This Week” and that makes it our star of the week!

 

 

Dog of the Week

 

Guyana Goldfields Inc. (GUY:TSX)

Current Price: $1.76

Market Cap: $ 305.41 Million

 

Dog Performance:

 

The stock was down 43% on the week and has cratered 63% year-to-date in 2018.

 

What does the company do?

 

Guyana Goldfields Inc. is a Canadian-based company engaged in the investment, acquisition, exploration, development and operation of mineral property interests, principally gold resource properties in Guyana, South America. The company’s primary focus is the production of gold from its 100% owned Aurora Gold Mine (or “Aurora”), which commenced commercial production on January 1, 2016.

 

What is driving the stock?

 

  • October 30th, 2018, the company reported gold production guidance was revised downward to 150,000-155,000 ounces as grades have not rebounded as quickly as anticipated in the fourth quarter. Down roughly 15% from the mid-point previous range of 175,000 -185,000 ounces of gold.  Cost have also revised and, looking forward, a revision to the life of mine production profile is anticipated. These are not good things!

 

Financial Results

 

Financially, the company is in a decent position and continues to produce cash flow, but if the grades at its primary asset are in question, this is the focus.

 

Q3 2018

  • Continued strengthening of the balance sheet with divestment of the Solgold Plc (“Solgold”) equity investment for gross proceeds of $35.5 million contributing to a total cash position of $92.6 million at quarter end.
  • Continued cash flow performance with $19.5 million of cash from operations, representing the 11th consecutive quarter of positive cash flow generated from operations since the start of commercial production on January 1, 2016. GOOD THINGS!

 

Conclusion:

 

This is a company that has cash in the bank and has been profitable with year, growing earnings up until it stubbed its toe in Q3 and the market punished the stock.

 

If you want to put some of your hard-earned capital into a mining and exploration stock – just know it is very high risk capital. The long-term track record of junior exploration companies in Canada is one of massive capital destruction. As a general rule, with real investment dollars, we would not touch a pure exploration stock with your proverbial ten-foot pole. Even for the good companies, and Guyana Goldfields has some merit in this regard, the mining industry is fraught with landmines – be it lower grades, declines in the commodities being mined, declining production, lack of skilled labour, geopolitical issues, environmental issues, it is hugely capital intensive, and has many more risks that make it unsuitable for smart investment dollars. That is a small soapbox for today – pay attention to it.  The next time your broker comes asking for you to pay up for shares in XYZ Mining Inc. Politely decline or rudely decline it that is your style – the point is, just decline. There are so many other productive businesses that can use your capital and at least have the potential to make your capital work for you!

 

The sharp declines make Guyana our Dog of the Week!



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