KeyStone’s Your Stock Our Take: Recipe Unlimited Corporation (RECP:TSX), STAR: Enghouse Systems Limited (ENGH:TSX) and, Inc. (KSI:TSX-V).

This week in our Your Stock Our Take Segment, we answer a listener question on Recipe Unlimited Corporation (RECP:TSX), a full-service restaurant operator with 24 restaurant brands under its umbrella including: Swiss Chalet, Harvey’s, The Keg, Milestones, Montana’s, East Side Mario’s, and Original Joe’s. A listener asks if we see value in this business.

Our first Star of the Week is no stranger to KeyStone’s clients as it has been in our Canadian Focus Buy Portfolio for 8+ years – Enghouse Systems Limited (ENGH:TSX), which provides enterprise software solutions serving a variety of distinct vertical markets including Contact Centers, Networks (OSS/BSS) and Transportation/Public Safety segments. The stock jumped 21% in one day last week after the company released strong fiscal 2019 results.

Our second Star of the Week is, Inc. (KSI:TSX-V), which designs, develops and supplies software for data and document management within regulated environments. The stock was up around 21% last week and up 155% year-to-date. We let you know why.


Your Stock, Our Take

Recipe Unlimited Corporation (RECP: TSX)

Current Price: $18.96

Market Cap: $423 million

What does the company do?

Recipe International is a full-service restaurant operator. The company has 24 restaurant brands under its umbrella including, but not limited to, Swiss Chalet, Harvey’s, The Keg, Milestones, Montana’s, East Side Mario’s, and Original Joe’s. In total, Recipe International owns a network of 1,375 restaurants and has a presence in 10 countries.

Key Points:

We actually followed this company very closely previously in our Income Stock research. Currently, the company pays a yield of 2.4%. It was relatively cheap on a price to earnings basis. We never did recommend the stock because it had challenges maintaining same store sales growth as well as consistent earnings per share growth. The share price performance has been very negative recently with the stock down 28% just since September.

Recent Financial Results:

  • Recipe International released its Q3 2019 financials on December 17th.
  • Total sales were down 1.2% for the quarter.
  • Same store sales were negative 3.1% for the quarter and negative 2.2% for the first 9 months of the year.
  • Adjusted earnings per share were down 11% for Q3 and down almost 13% year to date.
  • Adjusted earnings per share over the last 12 months were $1.77 which puts the price to earnings valuation multiple at about 11 times.

Our Take:

On the positive side, Recipe International appears to be producing a meaningful level of cash flow and profit and its also very cheap on a price to earnings basis. This is also what I saw when I followed the company more closely in the past. So it appears to be a value stock but is it really a value trap?

It certainly is not a growth stock. The lack of EPS growth and same store sales growth is troublesome. One thing that’s important to understand is that restaurant and retail stocks really live and die on their same store sales growth numbers. Investors want to see that existing restaurants are doing better and becoming more profitable. This was the issue in the past when I was following the company more closely. The lack of same store growth has hindered the stock price even during periods when revenues and earnings grew due to acquisitions.

Long-term, there may be some value in the stock but its not something that we would recommend buying right now. At least not until we see clear signs that financial performance is improving.


Weekly Star, Inc. (KSI:TSX-V)

Current Price: $2.42

Market Cap: $144 Million

Star Performance:

The stock was up around 21% last week and up 155% year-to-date.

What does the company do?

Kneat designs, develops and supplies software for data and document management within regulated environments. The company’s current product is Kneat Gx, a configurable, commercial, off-the-shelf application focused on validation lifecycle management and testing within the life sciences industry (i.e. biotechnology, pharmaceutical and medical device manufacturing).

Complete and comprehensively documented validation of processes, products, equipment and software is a significant and costly regulatory requirement in this industry. Kneat Gx provides a compliant digital solution that enables companies in the life sciences industry to become efficient and compliant with an automated process that has traditionally been manual, inefficient and paper-based.

What is driving the stock?

The company’s positive Q3, 2019, financial results have been propelling the stock higher.

Financial Results (November 26th, 2019)

Q3, 2019

  • Revenue increased 538%, to $1.586 million compared to the same quarter last year.
  • Annualized recurring revenue, which include software-as-a-service (SaaS) license fees and maintenance fees were $1.4 million, an increase of 215% compared to the same quarter in 2018.
  • EBITDA was a loss of $770 thousand compared to a loss of $1.52 million compared to the same quarter last year.
  • Fully diluted earnings per share (EPS) was also a loss of $0.02 per share compared to a loss of $0.04 cents for Q3, 2018.


Taking a look at the company’s balance sheet, they have a debt-to-equity ratio of 0.13 and a net cash position of $5.4 million which is quite healthy.

Looking at the company’s current valuation multiples, they are trading at a price-to-sales multiple of about 48 times trailing revenue, which values the company at quite a large premium to the market as similar revenue growth is most likely being priced in going forward.

Now, Kneat has a unique product offering to the life sciences industry and we like the opportunity in the space as firms have been showing a trend toward adoption of data-management software.

We also like the company’s impressive growth in revenue, focus on its recurring SaaS sales and its current financial position.

However, Kneat has yet to break into profitability which makes the company fall short from meeting KeyStone’s investment criteria and they are currently trading at a pretty pricey multiple which is a concern if we were to be considering the stock as an investment.

Overall, the company’s positive Q3 financial results have propelled the stock higher and allowed Kneat to claim our coveted status of Star of the Week.


Weekly Star

Enghouse Systems Limited (ENGH:TSX)

Current Price: $47.06

Market Cap: $2.5 Billion

 Star Performance:

The stock was 21 in the last 3-days. 

What does the company do?

Provider of enterprise software solutions serving a variety of distinct vertical markets. Its strategy is to build a diverse software company through strategic acquisitions targeting the Contact Center, Networks (OSS/BSS) and Transportation/Public Safety sectors.

Enghouse serves a number of distinct vertical markets through two divisions. The Interactive Management Group (IMG) division sells a suite of software to manage contact centres, while the Asset Management Group (AMG) business provides solutions for networks and transit management.

What is driving the stock?

A Q4 2019 revenue and earnings beat.

Financial Results (October 24th, 2019)

Q4 2019

Fourth quarter revenue was $109.3 million, a 27.4% increase compared to revenue of $85.8 million in the fourth quarter of the prior year.

Adjusted EBITDA for the fourth quarter was $34.0 million or $0.62 per diluted share, compared to $27.9 million or $0.51 per diluted share last year, with the increase being primarily attributable to incremental revenue contributions from acquisitions.


The surprisingly strong Q4 had analysts raising their revenue and EBITDA targets for 2020. Enghouse generated roughly $110 million in adjusted FCF in F2019. FCF is likely to be even higher next year given a full year of contribution from integrated acquisitions.

2019 was a record year of acquisitions, with the company deploying $101 million. The company ended the quarter with $150.3 million of cash and no debt.  The strong cash balance and growing cash flow suggest to us that management can deploy even more to acquisitions in the future. Management continues to prioritize acquisitions and targets 15%-20% of free cash flow for dividends.

From a valuation perspective Enghouse, despite the jump, trades with a trailing EV/EBITDA of around 21. Given continued growth in 2020, the multiple should be lowered to the range of 17, which is moderately low in comparison to peers.

We will be updating clients fully on the recent quarter along with our current rating on the stock.  The share jump in the company’s shares over the past week give it coveted status of Star of the Week.



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