KeyStone’s Your Stock Our Take; Namsys Inc. (CTZ:TSX), our Star of the Week is Silvercorp Metals Inc. (SVM:TSX), and our Dog of the Week is Tucows Inc. (TC:TSX).
This week in our Your Stock, Our Take we take a look at, Namsys Inc. (CTZ:TSX), which offers software solutions for currency management and processing for the banking and merchant industries principally in North America. A listener asks our take this profitable micro-cap stock. Our Star of the Week is, Silvercorp Metals Inc. (SVM:TSX), primarily a silver-producing mining company engaged in the acquisition, exploration, development, and mining of precious and base metal mineral properties in China. The stock is up 9% this week, 16.5% in the last month and is up 20% year-to-date. We let you know what is driving the move and whether it is sustainable. Finally, our Dog of the Week is, Tucows Inc. (TC:TSX), which provides Internet Domain Services and Network Access. Domain Services make for the bulk of the company’s revenue through the registration fees charged to resellers in connection with new, renewed and transferred domain name registrations, the sale of retail Internet domain name registration and email services. The stock was a TSX under-the-radar star for years, but premium valuations, a recent weak quarter and lower guidance have conspired to drop the stock nearly 50% in the last 3-months. Is it a Dog or opportunity?
Your Stock, Our Take
I know Namsys is small, but the company is profitable and seems to be growing. I It recently hit new highs – your thoughts?
Elaina, Oshawa – Emailed the question.
Namsys Inc. (CTZ:TSX)
Current Price: $0.86
Market Cap: $23.5 million
What does the company do?
NamSys Inc. is a Canada-based company which is engaged in the development and production of currency inventory management and control systems for financial institutions, retailers, currency carriers, casino and mass transit operators, and various government agencies. The company offers software solutions for currency management and processing for the banking and merchant industries principally in North America. The company generates its revenue in form of software license fees, systems maintenance fees, and other income.
Key Points:
The company is currently trading at record levels, which has only been matched historically be a brief period in August of 2017 when the company peaked at $0.89 a couple times. In the last twelve months, the stock is up 39% and is up 10% in the last month.
Recent Quarterly Financials:
- Revenue for the second quarter ended April 30, 2019 was $1.0 million, an increase of 29% over the prior year period.
- Adjusted Net Income grew to $432,632 in the second quarter of 2019, compared to $411,465 in the second quarter of 2018, up 5%.
- Adjusted EBITDA was $510,687 in the second quarter of 2019, compared to $365,023 in the second quarter of 2018, up 40%.
Our Take:
P/E: 17.2x
EV/EBITDA: 11.6x
Current Ratio: 5.54
Cash Ratio: 1.60
Net Cash: $3.9 million
Essentially no debt.
The company seems to be focusing on developing its recurring revenue sales (SaaS sales) as apposed to single-sale term license sales. Recurring revenue accounts for over 80% of total sales revenue. We like to see recurring revenue as a priority for companies, as it results in less fluctuation and volatility. Its current valuation multiples are quite reasonable considering its recent revenue and EBITDA growth. As for its balance sheet, with essentially no debt and net cash of more than double the company’s annual EBITDA (cash ratio of 1.60), the company is very liquid and is in a position to respond to events as required. The cash position is 82% of Total Assets.
Overall, a good-looking company with promising growth. It will be interesting how the company decides to deploy its cash and how its growth progresses. It would be nice to see the company’s cash be converted into value generation units of the business.
Weekly Star
Silvercorp Metals Inc. (SVM:TSX)
Current Price: $3.44
Dividend Yield: 0.977%
Market Cap: $554.2 Million
Star Performance:
The stock was up 9% this week, 16.5% in the last month and is up 20% year-to-date.
Since 2018, the stock has been range-trading between $2.50 & $4.00.
What does the company do?
Silvercorp Metals Inc. is a silver-producing Canadian mining company. The company is engaged in the acquisition, exploration, development, and mining of precious and base metal mineral properties in China. The company is the primary silver producer in China through the operation of over four silver-lead-zinc mines.
For its most recent quarter, the sale of silver contributed to 47.7% of sales, gold contributed to 2.3%, and together lead & zinc represented 50% of total sales.
What is driving the stock?
Looking at the price of the commodities it sells over a year-to-date period, silver is down 0.9%, gold was up 10%, while zinc and lead were both up around 2%.
The company released its most recent quarterly results in May of 2019, but nothing of real significance stood out in the company’s performance.
Financial Results
Q3 2019 (March 31, 2019) – released May 23rd.
- Revenue decreased to $34.95 million compared to $38.45 million, down 9.1% over the prior period.
- Net Income increased to $15.94 million compared to $14.71 million, up 8.36%.
- On a diluted per share basis, $0.07, unchanged from the prior year’s quarter.
- EBITDA decreased to $20.94 million compared to $24.06 million, down 12.96%.
Conclusion:
The company trades at a trailing twelve-month EV/EBITDA ratio of 4.76 and has a P/E ratio of 11.23. Both ratio’s look relatively attractive, except that the company hasn’t been able to produce much growth and due to solely operating in China the company does have a high degree of risk.
The company’s balance sheet looks strong, with little debt and a large net cash position of $63 million, which is approximately 10% of the company’s market capitalization.
With a lack of news and growth, the company’s decently attractive fundamentals, along with a strong balance sheet and investor optimism surrounding precious metals might be what is contributing to the stocks run.
However, it is not a stock that we would recommend to clients due to a lack of growth and the additional risk the company is exposed to by operating within China.
Nevertheless, its move this week and past few months make it our Star of the week!
Weekly Dog
Tucows Inc. (TC:TSX)
Current Price: $64.69
Market Cap: $690 Million
Dog Performance:
Around the end of April and beginning of May, the company’s share price was at an all time high in the $115 to $120 range. On May 9th, the price plummeted down to $92.87, and then continued to fall gradually until July 9th when it was $79.84. The company then plummeted again over the next week to its current price of $64.69. In percentage terms, the company is down 20% in the last week and down 46% in the last 3 months.
What does the company do?
Tucows Inc. has a predominant technology market in the United States and to a lesser extent in Canada and Germany. Its services touch upon two segments in the technology sector; Domain Services and Network Access. The Domain Services make for the bulk of the company’s revenue through the registration fees charged to resellers in connection with new, renewed and transferred domain name registrations, the sale of retail Internet domain name registration and email services. Its Network Access Services on the other hand deal with the retail sale of mobile phones, broadband services, internet hosting and consulting through the Ting website in the United States.
What is driving the stock?
Poor Q1 2019 results in the evening on May 8th (results below). The results showcased shrinking revenue and earnings and disappointed investors.
Financial Results
$USD
Q1 2019 compared to Q1 2018
- Revenue was $79.0 million compared to $95.8 million, down 18%.
- Reported net income was $2.8 million compared to $3.7 million, down 25%.
- On a diluted per share basis, $0.26 compared to $0.35, down 26%.
- Adjusted net income was $2.7 million compared to $3.6 million, down 25%.
- On a diluted per share basis, $0.25 compared to $0.34, down 25%.
- Adjusted EBITDA was $9.4 million compared to $10.4 million, down 9%.
Tucows also reported on July 9th, its Ting Mobile subsidiary will be migrating customers from T-Mobile’s network to Verizon. Near term, the company revised its 2019 cash EBITDA guidance lower to $52 million from the previously provided $62 million. This impacted the stock.
Conclusion:
P/E: 43.1x
Adjusted P/E: 43.9x
EV/EBITDA: 16.2x
Current Ratio: 0.76
D/E: 1.25
Conclusion
Tucows historically has been a company that for the most part has had consistent growth, both on the income statement and in share price. The growth had been relatively strong, but the valuations (60+ times earnings) reached a premium. Any stumble and the company’s shares were vulnerable. The company’s weak Q1 started the stumble
Tucows is also investing in a fledgling but unproven fiber division and expects current investments to produce growth next year. The company’s Domain Services Division did have a tough comparable quarter in Q1 2018 – which marked a one-time type sale of $14 million plus in lower margin domain names. Even with the nearly 50% drop in the share price over the last 3-months, the company remains with relatively high multiples of 40+ earnings and 16 + EV/EBIDA. Management has succeeded in the past, and the domain business still kicks off solid cash flow, but the higher valuations, negative near-term guidance and recent share drop make Tucows our Dog of the Week.
