KeyStone’s Your Stock Our Take: The Second Cup Ltd. (SCU:TSX), Star: Solium Capital Inc. (SUM:TSX), Dog: HIVE Blockchain Technologies Ltd. (HIVE:TSX).
This week in our Your Stock, Our Take segment we look at The Second Cup Ltd. (SCU:TSX), a Canadian specialty coffee retailer operating franchised and company owned cafes across Canada. Shares in the company have performed very poorly long-term, but a September partnership with TSX-Venture-listed National Access Cannabis (META.V) to convert select Second Cup locations into National Access Cannabis branded dispensaries is intriguing. With the company in a strategic review and looking to boost profitability, a listener asks if the stock is finally worth a look? Our Star of the week is Solium Capital Inc. (SUM:TSX), which provides cloud-enabled services for global equity-based incentive plans including administration, financial reporting and compliance. The stock surged 42%, Monday after Morgan Stanley announced it will acquire Solium’s shares in an all cash transaction for $19.15. The total transaction is valued at approximately CAD$1.1 billion. Finally, our Dog of the week is HIVE Blockchain Technologies Ltd. (HIVE:TSX) – owns state-of-the-art GPU-based digital currency mining facilities in Iceland and Sweden, which produce newly minted digital currencies like Ethereum continuously as well as cloud-based ASIC-based capacity which produces newly minted digital currencies like Bitcoin. The stock is down over 85% in the last year. Is it a Dog or an opportunity?
Welcome my co-host, KeyStone’s Senior VP of Research, Mr. Aaron Dunn.
Your Stock, Our Take
The Second Cup Ltd. (SCU:TSX) has been hit hard in recent years – does its Cannabis partnership and what looked like a better last quarter have you interested in this stock at all – what is your take?
- Cheryl V. – via twitter.
Your Stock, Our Take
The Second Cup Ltd. (SCU:TSX)
Current Price: $1.95
Market Cap: $39.28 million
What does the company do?
Founded in 1975, The Second Cup Ltd. is a Canadian specialty coffee retailer operating franchised and company owned cafes across Canada. The company’s vision is to be the Canadian specialty coffee brand of choice across Canada, committed to superior quality, innovation and profitable growth.
Second Cup is a Canadian specialty coffee retailer with 270 cafés operating under the trade name Second Cup™ in Canada, of which 24 are company owned and the balance are operated by franchisees. As the Canadian specialty coffee company, bringing the best coffees in the world to customers is at the core of the brand and fundamental to redefining Second Cup as the coffee brand most passionately committed to quality and innovation. In January 2018, Second Cup announced a move to Clean Label beverages, with a commitment to eliminate artificial colors and flavors, preservatives, and high fructose corn syrup from all beverages on the menu.
Key Points:
Recent Quarterly Financials
Revenue grew 11% from $5.3 million in Q3 2017 to $5.9 million in Q3 2018. Adjusted EBITDA grew 15% from $798,000, or 15% of revenue, to $921,000, or 16% of revenue. Cash flow from operations grew 80% from $515,000 to $925,000. Net income increased from a loss of $2.96 to a gain of $766,000.
Key Points
TSX-listed Second Cup (SCU.TO) and TSX-Venture-listed National Access Cannabis (META.V) made waves back in September 2018 when they first announced their strategic alliance to convert select Second Cup locations into National Access Cannabis branded dispensaries.
While not exactly the sign of a marijuana coffee revolution, the potential for CBD-infused coffee has quietly grown into one of the cannabis industry’s most promising new product categories.
The excitement surrounding CBD-infused coffee lies in the potential for a new functional drink; one that raises alertness levels without putting you on “edge”.
The jury, however, is still out on how exactly caffeine interacts with CBD. Some believe that caffeine cancels out the calming effect of CBD — while others argue that CBD’s mellowing effect dampens caffeine jitters.
NAC and Second Cup plan to develop a network of NAC-branded (Meta) and operated recreational cannabis stores in provinces where legally permissible. Two conversions are underway in Alberta.
Conclusion
The balance sheet has been strengthened and now has the capacity to support a broader range of strategic alternatives to create shareholder value. There is no guarantee this strategic review will result in any avenues being pursued. The expansion of Pinkberry premium frozen yogurt across the country at Second Cup has helped sales – having said this, same store sales grew by only 0.3% in Q3.
Fundamentally, Second Cup appears to be somewhat oversold. The company has strengthened its balance sheet and with cash out of the equation, the stock trades at under 6 times FFO.
Despite an uptick in this last quarter, business is not growing overall – in fact over the past 3 years’ annual sales are down from $37 million to $23 million last year. For the first nine-months of 2018 are down 4.5%. We would be far more interested in the company if revenue growth returned.
MONITOR at present.
Weekly Star
Solium Capital Inc. (SUM:TSX)
Current Price: $19.10
Market Cap: $ 1.083 million
What does the company do?
Solium Capital Inc. provides cloud-enabled services for global equity-based incentive plans including administration, financial reporting and compliance. From offices in the United States, Canada, Europe, Australia, and Hong Kong, the company’s innovative software-as-a-service (SaaS) technology powers share plan administration and equity transactions for more than 3,000 corporate clients with employee participants in more than 100 countries.
Star Performance:
February 11, 2019 Solium Capital announceed that the company entered into a definitive arrangement agreement (the Arrangement Agreement) with Morgan Stanley under which Morgan Stanley, through a wholly-owned subsidiary, will acquire all of the issued and outstanding common shares of Solium (Solium Shares), subject to the approval of the Solium shareholders.
Under the terms of the Arrangement Agreement, Morgan Stanley will acquire Solium’s Shares in an all cash purchase pursuant to an arrangement under the Business Corporations Act (Alberta) (the Arrangement) and pay CAD$19.15 for each Solium Share (the Purchase Price). The total transaction is valued at approximately CAD$1.1 billion.
42.96% gain on the day – Monday.
Conclusion
Solium’s balance sheet was great and we liked the business and the recurring nature of a good portion of the revenues.
The valuations were relatively high prior to the acquisition – Morgan Stanley is paying a significant premium for this quality business, but they can afford it. It is a win for shareholders and we expect the transaction to proceed.
The jump today makes Solium our Star of the week!
Weekly Dog
HIVE Blockchain Technologies Ltd. (HIVE:TSX)
Current Price: $0.395
Market Cap: $130 million
