KeyStone’s Your Stock Our Take: Atlas Engineered Products Ltd. (AEP:TSX-V), our Star of the Week is XPEL Inc. (XPEL:NASDAQ), and our Dog of the Week is Frankly Inc. (TLK:TSX-V).
This week in our Your Stock, Our Take we take a look at, Atlas Engineered Products Ltd. (AEP:TSX-V), a Canadian based supplier of trusses and engineered wood products. The micro-cap recently posted a very strong second quarter, has broken into profitability and has strong growth guidance for its 2019 financial results overall. A listener asks us our take.
Our Star of the Week is, XPEL Inc. (XPEL:NASDAQ), a company which should be no stranger to clients having been a top buy recommendation in both our Canadian and U.S. research. XPEL is a global provider of protective films and coatings, primarily to the automotive industry. The stock was up 23% in one day last week, 40% in the last month, and is now up 518% since we recommended it to clients just under two years ago at US$1.42. Can it continue?
Finally, our Dog of the Week is, Frankly Inc. (TLK:TSX-V), which provides a software platform for brands and media companies to create, distribute, analyze, and monetize their content on the web, mobile and television. The stock was down 22.31% this week and down 68.44% in the last month. More than qualifying it as a Dog. It is an opportunity or will this dog keep barking?
Your Stock, Our Take
Atlas Engineered Products Ltd. (AEP:TSX-V)
Current Price: $0.43
Market Cap: $21.1 million
What does the company do?
Atlas Engineered Products Ltd is a Canadian based supplier of trusses and engineered wood products. It is engaged in principal activities of manufacturing trusses for commercial and residential buildings and delivering to its customers on Vancouver Island and the Lower Mainland. The company operates in the geographical segment located on Vancouver Island. The group generates revenue from the business segments of Trusses, engineered wood products, Freight and Steel.
Since January 2018, when the company’s shares traded at $0.70, the company has experienced a steady decline in share price, bottoming out at $0.29 on March 1st, 2019. However, since then, the share price has begun gradually increasing again, and currently sits at $0.43.
On March 5th, the company completed the acquisition of South Central Building Systems, an energetic, high performance company with efficient automation, capacity to increase output, and a loyal and growing customer base in the middle of over 25+ growing communities in Southern Manitoba. On closing, AEP paid a $300,000 deposit against $2,500,000 cash purchase price and assumed debt for the remainder. This debt will be paid to previous South Central shareholders at a rate of 10% per year until it has been paid off, in addition to further share-based compensation.
On May 16th, the company announced a realignment of its executive team to add a stronger emphasis to its operations and growth plans. Shortly after, on May 22nd, the company completed its first customized wall panel project, utilizing the recent acquisition to increase efficiency. In the two-week span between May 16th and May 30th, the company’s share price increased 18% from $0.31 to $0.36.
Recently, on July 29th, the company posted its first ever bottom-line profitable quarter since the current incarnation of the company (since November 2017). The share price has risen 9% since then.
Recent Quarterly Financials:
- Revenue for the second quarter ended June 30, 2019 was $9.1 million, an increase of 196% over the prior year period.
- Net Income grew to $162,876 in the second quarter of 2019, compared to a loss $485,317 in the second quarter of 2018.
- Adjusted Income grew to $604,183 in the second quarter of 2019, compared to a loss $112,177 in the second quarter of 2018.
- Adjusted EBITDA was $1.6 million in the second quarter of 2019, compared to $106,775 in the second quarter of 2018.
The Company’s revenue objective for 2019 is to reach an annualized revenue run rate of $40-50 million with an EBITDA margin of 10-15%.
On a pro-forma basis, taking seasonality into account, management believes the acquisitions the Company has completed, the addition of new product lines and sales staff to specific regions, and the focus on improved costs, should enable those targets to be achievable, and now believes an EBITDA margin in the range of 15-20% (17.4% in Q2 2019 and 2.7% in Q2 2018) may be achievable this year.
Negative TTM Earnings and Adjusted Earnings
Low-End 2019 EBITDA projection: $4 million -> Forward EV/EBITDAe: 8.45
High-End 2019 EBITDA projection: $7.5 million -> Forward EV/EBITDAe: 4.51
Current Ratio: 1.01
Net-Debt/EBITDA (low-end 2019): 3.18
Net-Debt/EBITDA (high-end 2019): 1.69
The company’s first half of 2019 has been a strong turnaround period. In the most recent quarter, it has finally broken into bottom-line profitability (although just barely) and has achieved positive EBITDA over the last 12 months and has kept its debt levels relatively low throughout. The company’s strategic acquisitions have played a large part in this turnaround, both in terms of increasing sales as well as increasing margins. While the company’s EV/EBITDA ratio is 38x on a trailing basis, management has projected EBITDA in the range of $4 million to $7.5 million for full-year 2019. Even on the low end, at current debt and market cap, this would result in an expected EV/EBITDA ratio of 8.5, which is looking far more affordable.
In summary, if management outlook is accurate, then even on the pessimistic end, there is value to be found in the company at current share prices.
XPEL Inc. (XPEL:NASDAQ)
Current Price: US$8.78
Market Cap: US$232.05 Million
The stock was up 23% in one day last week, 40% in the last month, and is now up 518% since we recommended it to clients just under two years ago at US$1.42.
What does the company do?
XPEL is a global provider of protective films and coatings, including automotive paint protection film, surface protection film, automotive and architectural window films and ceramic coatings. The primary product and service is automotive paint protection film – typically applied aftermarket – but the company works with dealers as well. The film prevents annoying scratched and dings on your vehicle, caused by flying debrides or minor bumps.
What is driving the stock?
Last week, the company reported record second quarter financial results.
- While revenues increased a modest 4.5% to $30.1 million compared to second quarter 2018 – sequentially, revenue growth was 21.7% compared to first quarter of 2019.
- Gross margin improved to 35.3% compared to 29.7% in second quarter 2018. This lead to better profitability.
- Earnings per share grew to $0.11 compared to $0.09 per share in second quarter 2018.
From our perspective, while the margin increase was very strong, the biggest positive nugget from the company’s Q2 conference call was that XPEL expects to return to close to 20% revenue growth for Q3. Combine this with improved margins and you will likely see better profits moving forward. As such, one can see why the stock surged last week and has now returned our clients over 500% in less than two years.
While the stock performance has been excellent, for us, what is encouraging going forward, is that the price gains have been driven by the underlying fundamentals. Revenues have more than doubled in the past 2-years and earnings look to have jumped 5-fold. This can support a 500% gain.
Finally, I will add that when we recommended XPEL, no broker or Big Bank was recommending the stock – basically the only independent research house covering the stock, and the only way it could have made it into your portfolio was by being a client of KeyStone’s research. XPEL was one of 10 select recommendations in our Canadian Growth Stock Focus Buy Portfolio and has been there for the past 2-years with 4-separate buy recommendations.
XPEL’s jump this week, month and over the past 2-years give it the coveted status of our Star of the Week.
Congratulations to all clients who owned the company.
Frankly Inc. (TLK:TSX-V)
Current Price: $1.01
Market Cap: $29.062 Million
The stock was down 22.31% this week and down 68.44% in the last month.
Looking at the chart, the company has had quite a volatile 2019, with the stock rising from $0.43 to $4.00 in May 2019 alone. But within the last month the stock has traced back these gains.
What does the company do?
Frankly Inc. is a Canada-based company that provides software platform for brands and media companies to create, distribute, analyze, and monetize their content on the web, mobile and television.
The company offers digital publishing software as a service (SaaS) and related advertising services for media sites on the Internet and its software enables site owners to design, build, and host sites to publish local content and information on digital platforms.
What is driving the stock?
On May 1st, 2019, Frankly announced the purchase of Triton Digital Radio Platform Assets, covering approximately 800 Radio Station Websites coming in at a purchase price of US$3 million. Not surprisingly, after the announcement of the purchase, the company’s share price began to ascend to its peak of $4.00 that it hit a month later.
On July 24th, 2019, Frankly Inc. also announced that it had entered into an agreement to acquire Vemba video asset management, syndication and monetization platform. Vemba is the premiere video syndication platform serving traditional media companies such as CNN and Vice Media among other notable broadcasters.
Frankly is targeting the company as it strengthens its position as the most advanced Over-The-Top (OTT) Video Management and Cloud Playout system for broadcasters. The CEO believes the acquisition will allow the company to offer a broader set of requirements for media companies which will enable Frankly to tap into a larger portion of their annual digital spend.
The company said that the acquisition would expand the company’s global footprint into other adjacent media markets, including such possible areas as eSports and gaming.
Q1 2019 (March 31st, 2019)
- Revenue decreased 68%, to $1.9 million from $5.8 million over the same quarter last year.
- Adjusted EBITDA was a loss of $1.7 million in Q1, 2019, compared to a loss of $0.8 million for Q1, 2018.
- Net loss decreased to $2 million in Q1, 2019, compared to a loss of $3.8 million for Q1, 2018.
Looking longer term, the company’s period over period twelve-trailing month (TTM) revenue actually decreased 20%, while the most recent (TTM) Adjusted EBITDA was a loss of $0.396 million and (TTM) Net Income was a loss of $9.4. million. The losses in Net Income and Adjusted EBITDA have been decreasing period over period, but still Revenue is falling which isn’t a great sign.
Looking at the company’s balance sheet, it has negative equity due to a large accumulated deficit, which is never a good sign for a company. And it has net debt of around $10.8 million which is very large.
So fundamentally, the company doesn’t look very attractive at all.
I think this is a story of the market becoming too optimistic after the purchase and acquisition announcements earlier this summer. Although the purchases do appear to steer the company in the right direction on its path toward profitability, it’s not a guarantee that these strategic moves will help the company fix its deteriorating revenue. Therefore, the stock has sold off to a more reasonable level as investors wait to see the change in fundamentals in the coming quarters – making it our dog of the week.