KeyStone’s Your Stock Our Take MTY Food Group Inc. (MTY:TSX), our Dog of the Week is Canadian Premium Sand Inc. (CPS:TSX-V), and Star; Cascades Inc. (CAS:TSX).

This week in our Your Stock, Our Take we take a look at MTY Food Group Inc. (MTY:TSX), a quick service industry giant that produces strong cash flow has produced strong long-term gains for our clients. A listener asks our current take on this stock which has recently been ranked a HOLD in our coverage. Our Dog of the Week is, Canadian Premium Sand Inc. (CPS:TSX-V), an exploration stage company engaged in the silica sand industry. The stock is down 32% in the past week, 35% year-to-date, and 55% in the last 12-months. Finally, our Star of the Week is, Cascades Inc. (CAS:TSX), a leader in the recovery and manufacturing of packaging and tissue products. is up 12% over the last week and 33% over the last month. We discuss the current valuations and see if it may be a long-term opportunity.

Cannabis Stocks – Q2 2019

It’s been a quarter to forget for cannabis investors.

Canadian pot stocks were among the biggest laggards in the second quarter of the year as a myriad of reasons, ranging from softer-than-expected sales to supply chain issues, continue to punish the sector.

“People were paying the high valuations thinking they’d get high growth and strong revenues, but so far that hasn’t come to pass – Aaron, you talked about this in a Video last week.

As of Friday’s close, CannTrust Holdings Inc. traded 36.7 per cent lower, the biggest decline in the second quarter among the Canadian cannabis companies that trade on the Toronto Stock Exchange.

Other cannabis companies which produced significant losses over the past three months include Aphria Inc. and Hexo Corp., which fell 26.1 per cent and 20.8 per cent, respectively. Following those names, Aurora Cannabis Inc., Cronos Group Inc. and Canopy Growth Inc. were also decliners in the quarter.

For me, the sector continues to be “news driven” rather than cash flow driven which is often difficult to quantify and leads to wild fluctuations.

I have seen analyst point to systemic issues in the Canadian Cannabis industry including signs of continued bottlenecks in distributing legal pot to provincial regulators, a stunted rollout of physical retail stores in some of the country’s biggest markets such as Ontario, British Columbia and Alberta, as well as delays in packaging and shipping cannabis.

These are certainly negatives in the near-term for the segment – our biggest concerns include the fact that not a single company in this hot segment is operationally profitable and that potential productive capacity exceeds demand.


Your Stock, Our Take

I know you guys covered MTY Foods in the past – your current take on the stock?

  • Stevie V.

MTY Food Group Inc. (MTY)

Current Price: $65.45

Market Cap: $1.65 billion

What does the company do?

MTY is a franchisor operating in the quick service food industry. The group franchises and operates corporateowned locations under a multitude of banners and brands such as Big Smoke Burger, Cafe Depot, Country Style, Croissant Plus, Cultures, Extremepita, Fabrika, Jus Jugo Juice, Koya Japan, ManchuWok, Muffin plus, Valentine, Van Houtte, Shushiman and many more.

Key Points:

In 2018, the company completed 5 acquisitions, investing a total of $325 million and adding 702 locations to the network. To date in 2019, MTY has announced 4 acquisitions including a merger with PapaMurphy’s which alone is valued at ~US$190.0 million (C$253.2 million).

At the end of Q1, MTY’s network had 5,941 locations in operation, of which 82 were corporate and 5,859 were franchised. The geographical split of MTY’s locations remained steady with 46% in the United States, 45% in Canada and 9% International. Subsequent to the acquisition of Papa Murphy, the geographic split will be 56% in the United States, 36% in Canada and 8% International.

Recent Quarterly Financials:

MTY released Q1 results on April 11th. Revenue increased 27.7% to $687.8 million. Same-store sales were down 1.4% compared to the same period last year. Canadian same-store sales were up marginally, making this the sixth consecutive quarter of positive growth. Same-store sales in the United States saw a decline as a result of the impact of adverse weather on the frozen treats segment. EBITDA increased 47% to $28.4 million. Normalized EPS increased 43.9% to $0.59.

For the last 3 years, revenue has grown annually by an average of 44%, EBITDA by an average of 37%, and adjusted EPS by an average of 43%.

On a trailing twelve-month basis, MTY reported adjusted EPS of $4.24 and adjusted EBITDA of $136.8 million.

Price-to-adjusted earnings of 14.9 times and EV-to-EBITDA of 13.4 times.

Our Take:

MTY has been growing aggressively by acquisition completing 5 deals in 2018 and announcing another 4 deals so far in 2019. This includes the merger with Papa Murphy announced in April which is valued at ~US$190.0 million (C$253.2 million). The acquisition strategy has driven substantial growth in revenue and earnings over the last 3 years. Where the company has been less successful is with same-store growth which has been slightly negative for the past several years. The balance sheet is healthy and the valuation is attractive relative to the growth. Unfortunately, MTY does not pay much of a dividend (yielding only 1%) but the dividend growth has been strong (19% in the last year). Overall, the company provides an interesting growth opportunity and there would be significant upside if management could improve same-store sales.


Weekly Dog

Canadian Premium Sand Inc. (CPS:TSX-V)

Current Price: $0.75

Market Cap: $15.9 Million

Dog Performance:

The stock is down 32% in the past week, 35% year-to-date, and 55% in the last 12-months. The stock actually peaked briefly at $3.53 on August 8th, 2018, after which it plummeted back down. The unfortunate purchaser that may have bought at that time and held until now would be down 79% in under 10 months.

What does the company do?

Canadian Premium Sand Inc is a Canada based company engaged in the silica sand industry. The company is focused on providing premium white silica sand to oil and gas operations in the Western Canada Sedimentary Basin. Its flagship project is located in the North-East of Winnipeg, Manitoba close to the community of Wanipigow.

What is driving the stock?

For news driven, exploration stage companies this is always the tough question as there is no underlying cash flow to value the business so the stock is trading on “future potential”, which is highly speculative.

What has changed with the business in the past 12-months to cut the share price in half? We would argue nothing a real significance other than the fact the stock should have not been at its previous levels to begin with.

Financial Results

Q2 2019 compared to Q2 2018

  • The company is not currently earning any revenue.
  • Net loss was $3.5 million compared to $1.1 million
  • On a diluted per share basis, a loss of $.16 compared to a loss of $0.12

From Most Recent MD&A

It is not likely the company’s Sand Project will be approved until later in 2019. At this time, a detailed updated development plan and budgeted construction cost estimate has not been finalized and further work needs to be completed to confirm, among other things, how the Wanipigow Sand Project will be funded, constructed, and developed. The company will need more money…leading to more share dilution.


Negative Earnings

Negative EBITDA

Negative Cash Flow

Current Ratio: 3.75

Canadian Premium Sand is simply, at this stage, an exploration company going through the process to get its project approved and secure speculative funding. The company currently has no revenues and is incurring significant losses. In the last year, the company has more than doubled its shares outstanding (after adjusting the previous year for the 15:1 share consolidation) – just to fund itself. One day, the Wanipigow Sand Project may be operational, but where nowhere near that point and the company will likely need further funding to stay operational mid-term. It is purely speculative and does not meet Keystone’s minimum criteria for investment. The significant share price losses it has incurred in the last week has earned its place as our Dog of the Week.


Cascades Inc. (CAS:TSX)

Current Price: $11.86

Market Cap: $1.14 billion

Star Performance:

Cascades share price is up 13% from $10.50 in the last week, and is up 34% from $8.88 in the last month. Year-to-date, the stock is up 16%.

What does the company do?

Cascades Inc., along with its subsidiaries, produces, convert and market packaging and tissue products composed mainly of recycled fibres. The company is organized into four main business segments: Containerboard, Boxboard Europe, Specialty Products (which constitutes packaging products) and Tissue Papers. Business activity of the company is functioned through Canada, United States, Italy, and other countries. Its customer base includes food processing companies, maintenance industry, accommodations, and housing industry, micro-businesses, and boutiques.

What is driving the stock?

On May 9th, the company released Q1 results, which pleased the market, resulting in a 21% increase in share price that week.

Following that, on June 28th, it was announced that Cascades had won a bid at auction for the acquisition of Orchids Paper Products assets through bankruptcy proceedings. Cascades will acquire the assets for a cash consideration of US$207 million. The acquired assets are expected to generate annual EBITDA of approximately US$45 million beginning in 2021, implying an acquisition multiple of approximately 5x.

Financial Results

Q1 2019 compared to Q1 2018

  • Revenue was $1.23 billion compared to $1.10 billion, up 12%.
  • Net income was $33 million compared to $72 million
    • On a diluted per share basis, $0.26 compared to $0.65, down 60%.
  • Adjusted EBITDA of $239 million compared to $207 million, up 15%.
    • On a diluted per-share basis, $2.49 compared to $2.11, up 18%.

The acquisition of Orchids Paper Products for $US2017 million is expected to add

US$45 million per year beginning in 2021.

Outlook from MD&A (prior to announcement of acquisition)

We are expecting near-term results to improve both sequentially and year-over-

year for all of our North American business segments, taking into account usual seasonal trends and current market dynamics. In containerboard, lower OCC prices are expected to moderate industry-wide demand and pricing headwinds. European Boxboard performance is expected to continue to benefit from recent acquisitions in addition to lower recycled fibre pricing, the benefits of which are expected to mitigate more moderate demand levels and second quarter holiday-related closures. We anticipate moderately improved near-term results in the Specialty Products segment, as the impact of lower recycled fibre pricing on the recovery sub-segment is expected to be offset by stronger volumes and stable pricing in packaging. Lastly, our outlook for Tissue is positive, driven by internal initiatives and expected improvements in market conditions, in addition to more favourable raw material pricing. We are making progress with our internal initiatives to realign this segment’s operational and financial performance, the early effects of which we began to see in the current quarter. In addition, management is focused and confident that the steps being taken will successfully position this segment for long-term success.


P/E: 56.48

P/EBITDA: 1.23

Current Ratio: 1.43

D/E: 1.19

While it may look like Cascades’ has falling profitability, much of that is in fact due to the company having $50 million in gains from acquisitions, disposals, and others in Q1 2018. The revenue and adjusted EBITDA figures are more indicative of the company’s current growth. The company is trading at a very low 1.23 times EBITDA. Even after adjusting for the $1.9 billion in net debt that the company has, it is still trading at 3.25 times EBITDA. The company’s affordable acquisition of assets last week will further increase EBITDA in a few years. These factors give Cascades a significant opportunity for value generation in the coming years. The company is a little more debt-heavy than we typically like to see, however, without much cash in the bank. If the company can continue growth and take advantage of its newly acquired assets, there is significant value in the company. The market has somewhat acknowledged this, with the recent price appreciation, and this led us to grant it our Star of the Week!


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