This week on KeyStone’s Stock Talk Podcast our Your Stock Our Take is Redishred Capital Corp. (KUT:TSX-V), our Star of the Week is Canfor Corporation (CFP:TSX), and our Dog of the Week is Prometic Life Sciences Inc. (PLI:TSX).
This week in our Your Stock, Our Take we take a look at, Redishred Capital Corp. (KUT:TSX-V), a profitable micro-cap stock in the information destruction and security industry. Through the Proshred system and brand the company operates on-site paper shredding trucks and plant-based shredding. A listener asks our take. Our Star of the Week is, Canfor Corp. (CFP:TSX), an integrated forest products company operating two segments; Lumber, and Pulp & Paper. Over the last 12 months the stock had been nearly cut in half, but shares jumped 61.31% this week after billionaire Jim Pattison offered to take the company private for approximately $982 million. Finally, our Dog of the Week is, Prometic Life Sciences Inc. (PLI:TSX), a revenue generating, biopharmaceutical stock with a pipeline of small molecule therapeutics under development to treat unmet needs in patients with liver, respiratory and kidney disease, including rare diseases. The stock dropped 23% yesterday, following a disappointing earnings release and is down an astonishingly 97% this year. Is it a Dog or opportunity?
Your Stock, Our Take
Redishred Capital Corp. (KUT:TSX-V)
Current Price: $0.94
Market Cap: $73.7 Million
What does the company do?
RediShred Capital Corp., through its subsidiaries, is in the information destruction and security industry. The primary business is onsite document shredding – RediShred grants and manages shredding business franchises under the Proshred trademark.
Key Points:
Redishred has had a very strong 2019 to date, with the stock up 57% since the beginning of January, when it traded at around $0.61.
Driving the move higher has been reasonable organic growth and the February acquisitions of Proshred and Secure e-Cycle for a purchase price of US$7.5 million. These acquisitions included on-site paper shredding trucks, plant-based shredding and baling equipment, client relationships, and other assets used in the shredding and electronics recycling businesses.
Recent Quarterly Financials:
- Revenue for the first quarter ended March 31, 2019 was $5.2 million, an increase of 65% over the prior year period.
- Net income grew to $509,522 ($0.008 per share) in the first quarter of 2019, compared to a $498,070 ($0.010 per share) in the first quarter of 2018.
- Overall net income increased by 2% while per share income decreased slightly.
- Adjusted EBITDA was $1.7 million in the first quarter of 2019, compared to $0.9 million in the first quarter of 2018, up 77%.
Our Take:
Negative TTM Earnings
P/E: 18.8x
EV/EBITDA: 18.4x
Current Ratio: 0.55
Debt/Equity: 0.36
Debt/EBITDA: 1.63
2019 has been a year of change and growth for Redishred. The February acquistions powered strong topline growth and in a generally positive market, powered the shares to new highs. We caution that the acquisitons have yet to provide per-share earnings growth due to the increased share count – but the prmise remains. At present, the company appears fairly valued traded in the 18 to 19 times earnings range. We do note that management is forecasting 2019 growth targets of 14% EBITDA growth from same locations alone over 2018 – this is a positive. The company has also seen a jump in debt levels in 2019 to fund growth. While it still has a pretty healthy balance sheet, the company has a history of keeping its balance sheet extremely well-maintained, providing extra trust that the new levels of net debt will not be a concern in the long-term.
We like the growth and management’s solid track record, but we reiterate that the stock appears fairly valued at present.
Weekly Star
Canfor Corp. (CFP:TSX)
Current Price: $15.26
Market Cap: $1.1 Billion
Star Performance:
Over the last 12 months the stock was down 48%, but this week the stock jumped 61.31% on positive news.
What does the company do?
Canfor Corporation is an integrated forest products company operating two segments, which include Lumber, and Pulp & Paper.
The company produces softwood lumber, pulp and paper products, remanufactured lumber products, engineered wood products, wood pellets and energy.
What is driving the stock?
On August 12, 2019, Canadian billionaire Jim Pattison offered to take the company private for approximately $982 million. Pattison’s Great Pacific Capital Corp., which already owns 51% of Canfor, proposed buying out the remaining shares for $16 a piece – which prices the company at about $2 billion.
After the announcement, the share price jumped to $15.27 per share.
Financial Results
Q2 2019 (June 30, 2019)
- Revenue decreased 10% to $1.313 billion from $1.459 billion over the same quarter last year.
- Adjusted EBITDA was down 84% to $54.6 million for Q2, 2019 compared to $349.7 million for the prior year quarter.
- Net Income was a loss of $48.6 million for Q2, 2019, compared to a gain of $169.8 million for Q2, 2018.
- On a diluted per share basis was a loss of $0.39 cents per share compared to a gain of $1.32 cents per share for the prior year period.
Conclusion:
Over the last twelve months, Canada’s softwood lumber industry has been struggling with low demand from the U.S. and high log costs due to a lack of supply from a pine beetle outbreak and harsh wildfires ravaging B.C. over the last couple of summers.
This has led Canfor and its competitors, Interfor, West Fraser and Tolko to announce that all of them would be cutting back on operations or shutting down mill’s altogether earlier this summer.
The company’s twelve-trailing-month (TTM) earnings are negative but the company’s (TTM) EV/EBITDA multiple is 8.1x.
The company also has a net-debt-to-equity ratio 0.35
So, in conclusion, Jim Pattison is targeting the company at lower prices while it has been facing industry headwinds. The stock has risen considerably after the announcement of the offer which has made it our Star of the Week.
Weekly Dog
Prometic Life Sciences Inc. (PLI:TSX)
Current Price: $9.00
Market Cap: $209.82 Million
Dog Performance:
Down 23% yesterday, following a disappointing earnings release and 97% this year.
What does the company do?
Biopharmaceutical corporation with a pipeline of small molecule therapeutics under development to treat unmet needs in patients with liver, respiratory and kidney disease, including rare diseases.
What is driving the stock?
At present, you name it Prometic’s got it! A recent share consolidation, financing and dilutive restructuring and poor financial performance top the list of recent negatives.
Prometic recently did what is called a share consolidation. Existing shareholders got 1 share for every 1,000 shares they held – what a deal. Reducing the share count from an astonishing 23,313,233,245 (23.3 billion) to 23,313,233 (23.3 million) common shares.
After recently completing a massive share consolidation, management converted;
- CND$229 million of outstanding debt converted into common chares – diluting existing shareholders once again. And then proceeded to raise –
- CND$114 million in gross proceeds raised in concurrent financings.
Hey, what can I say, good on them for finding someone willing to fund this money pit once again.
The drop yesterday was powered by weak Q2 results.
Total revenues for the quarter ended June 30, 2019 were $8.8 million compared to $20.2 million during the comparative period of 2018 which represents a decrease of $11.4 million.
The company also reported significant operating losses and incurred a net loss of $133.7 million mainly driven by the impact of the loss on extinguishment of liabilities caused by the debt restructuring.
Conclusion
Why did they conduct the “Refinancing Transactions”? The company’s explanation:
The Refinancing Transactions were a result of the increasingly challenging financial and business conditions faced by Prometic in the last year, including its inability to raise sufficient equity, equity-linked or debt financing to fully fund execution of its business plan and delays in the regulatory approval and commercialization of Ryplazim.
Our Take: The main reason the company found it difficult to raise capital was the fact that the company has allocated invested capital very poorly historically. In fact, Prometic, has an accumulated deficit of $922.93 million – the company has taken in close to $1 billion in capital and created no current ongoing capital with those investor dollars. Not a track record I want to invest in.
Alas, as they say, there is a sucker or in this case likely hundreds or thousands of suckers born every day and the company was once again recently able to restructure and raise further capital.
I think you could give some fairly challenged people roughly $1 billion dollars and they could have created something that would be, by now, creating solid economic value.
Perhaps there are some promising products in the pipeline for Prometic, but the track record, reckless dilution and lack of current cash flow make it too risky for our blood despite the collapse in the share price.
