KeyStone’s Your Stock Our Take: Freshii Inc. (FRII:TSX), STAR: Innergex Renewable Energy Inc. (INE:TSX) and DOG: Lightspeed POS Inc. (LSPD:TSX).
In our Your Stock Our Take Segment we answer a listener question on, Freshii Inc. (FRII:TSX), a health and wellness brand, with 464 restaurants in 16 countries and 700 more points of distribution around the world. Despite a growing restaurant network and expanding retail partnerships, the company has struggled with same-store-sales growth and is trading close to all-time lows. A listener asks if the company is a potential turnaround story?
Our STAR of the Week is Innergex Renewable Energy Inc. (INE:TSX), a developer, owner and operator of run-of-river hydroelectric facilities, wind energy, and solar farms in North America. In a hot alternative energy space, the stock was up around 16.5% this week and up 30% year-to-date. We examine what is driving the gains.
Our Dog of the Week, Lightspeed POS Inc. (LSPD:TSX), which provides a omni-channel commerce-enabling SaaS (software as a service) platform for small and medium-sized businesses. The stock, which has been somewhat of a market darling after its 2019 IPO, dropped significantly after its Q3 results and 2020 financial outlook. We take a look at if the drop is justified or an opportunity.
Your Stock, Our Take – Question
Freshii is a restaurant that I enjoy, but I have noticed their stock is not doing well at all. I saw that revenues have increased, what are the issues and could it be a potential turnaround? Buy low, sell high?
- Sarah – via email.
Your Stock, Our Take
Freshii Inc. (FRII:TSX)
Current Price: $2.32
Market Cap: $75.21 Million
What does the company do?
Founded in 2005, Freshii is a health and wellness brand, with 464 restaurants in 16 countries and more 700 points of distribution around the world. With a diverse and completely customizable menu of breakfast, soups, salads, wraps, bowls, burritos, frozen yogurt, juices, and smoothies served in an eco-friendly environment, Freshii caters to every taste and dietary preference. The store base is approximately 99% franchised, with 461 franchised locations and 3 company-owned stores.
Past 3 Years & Trailing 12-month Results
- Royalty revenue and coordination fees, Freshii’s most predictable and stable recurring revenue streams, increased 14% to $4.8 million for Q3 2019 over Q3 2018;
- Same-store sales growth for Q3 2019 was -3.7%, compared to same-store sales growth of -0.8% for Q3 2018;
- Net income (loss) was ($0.4) million for Q3 2019, no change compared to Q3 2018;
- Adjusted EBITDA was $1.8 million for Q3 2019, an increase of $0.4 million or 29% over Q3 2018;
Freshii has turnaround potential, but with significant management change over the last year and a new plan moving forward that is only just starting to take shape, the company is in its early innings at best, and at this stage there is little evidence which way it will go. The good news is, the company starts with a solid foundation in terms of a strong balance sheet with $29 million or 38% of its market cap in cash. And the business is posting break-even results and not bleeding cash. From a valuation perspective, the company currently trades for 35 times adjusted earnings, or 19 times adjusted earnings after adjusting for the net cash position. This is somewhat expensive pricing for a food and drink chain. However, if we look at multiples of FFO, the company trades for just 11 times FFO, or 6 times FFO after adjusting for the net cash position.
At present, the company is not issuing guidance on profitability moving forward. As such, and given the negative 3.7% same-store-sales numbers in Q3, we would not buy Freshii at present. It is certainly a company we monitor with turnaround potential.
Innergex Renewable Energy Inc. (INE:TSX)
Current Price: $22.24
Market Cap: $3 Billion
Dividend Yield: 3.15%
What does the company do?
Innergex Renewable Energy is a developer, owner and operator of run-of-river hydroelectric facilities, wind energy, and solar farms in North America.
Innergex conducts operations in Canada, the United States, France and Chile and manages a large portfolio of assets currently consisting of interests in 68 operating facilities with an aggregate net installed capacity of 2,588 MW (gross 3,488 MW), including 37 hydroelectric facilities, 26 wind farms and five solar farms.
The stock was up around 16.5% this week and up 30% year-to-date.
What is driving the stock?
The share price is up this week after Hydro-Quebec announced that they will invest $661 million for nearly a 20% stake in Innergex and the companies also established a strategic alliance. Under the terms of the deal, Hydro-Quebec has initially committed $500 million to develop power projects with Innergex and they expect to combine expertise in renewable energy and build on their strengths to accelerate their development in North America, Latin America, and Europe.
- Revenue increased 23%, to $143 million compared to the same quarter last year.
- EBITDA improved 28% to $107 million.
- Earnings per share (EPS) increased 29% to $0.09 per share compared to $0.07 for Q3, 2018.
Looking at the company’s balance sheet, they have a net-debt position of $4.3 billion and an adjusted net debt-to-EBITDA multiple of 10.4 times, which is extremely high. Usually for utilities companies we like to see the net debt-to-EBITDA multiple around 5 times or under.
And on a current valuation basis, the company has a trailing EV-to-Adjusted EBITDA multiple of around 17 times, which I believe right now indicates the company is fairly valued.
Now I personally love the renewable energy space as it is hot right now. But we are evaluating the company not the sector they operate in. Innergex has shown decent growth in its financials but it is highly leveraged and doesn’t seem to offer much value at present. Its new strategic alliance with Hydro-Quebec seems promising going forward but Innergex is not currently a company that KeyStone is recommending to clients right now, as we like a few other names in the renewable energy space that are showing more investment potential.
We will continue to monitor the stock going forward, but its recent share price performance after its alliance with Hydro-Quebec make it our Star of the Week.
Lightspeed POS Inc. (LSPD:TSX)
Current Price: $37.62
Market Cap: $3.2 billion
What does the company do?
Lightspeed POS Inc provides a omni-channel commerce-enabling SaaS (software as a service) platform for small and medium-sized businesses. Its software platform provides customers with the functionality to engage with their own consumers, manage their operations, accept payments, and grow their business. Lightspeed sells its platform in over 100 countries throughout the world.
Lightspeed has seen its share price drop 12% over the last 5 trading days. The decline was precipitated by the release of the company’s fiscal Q3 2020 financial results on February 6th.
Previous to the release of the Q3 results, the stock price had a strong, albeit volatile, run and is up 100% over the last 12 months.
What is going on here? Is this pullback an opportunity for investors are a sign of more trouble to come for Lightspeed.
Recent Financial Performance (Fiscal Q3 2020):
- Q3 revenue was up 61% to $32.2 million.
- Recurring software and payments revenue of $28.4 million, an increase of 58%.
- Adjusted EBITDA loss was -$5.3 million.
- Cash burn for the quarter was $10.7 million.
- Q4 2020 Guidance: Revenues of $35 – $35.7 million, representing year-over-year growth of 64% – 68%, bringing the full year revenue to approximately $120 million, or growth of ~55%. Adjusted EBITDA loss of approximately $7 million.
- The balance sheet is strong with $126 million in cash.
- Lightspeed now services over 74,000 customer worldwide, an increase from 47,000 a year ago. This is inclusive of approximately 8,000 customer locations added as part of the acquisition of Gastrofix on January 7, 2020.
I think that Lightspeed has some attractive characteristics such as revenue and customer growth and a solid balance sheet. However, this isn’t a stock that KeyStone would be ready to pull the trigger on. It really comes down to profitability of which Lightspeed still doesn’t have any. The company burned through over $10 million in cash in its most recent quarter and is expecting negative EBITDA in fiscal Q4. If you don’t care about profitability as an investor then Lightspeed might be something to take a look at. But right now, the company has yet to prove a profitable business model and that is a minimum criterion for KeyStone. We will continue to monitor the company but wouldn’t suggest taking any positions.