KeyStone’s Stock Talk Podcast Episode 129
This week we start with a Case for Debate on a unique Canadian Small-Cap Quarterhill Inc. (QTRH:TSX) is a Canadian company that focuses on intellectual property and the Intelligent Transportation Systems industry (ITS). It is a cash rich business, which success of failure is tied to management’s ability to successfully navigate mergers and acquisitions (M&A) as well as a substantial judgment in a lawsuit against Apple (NASDAQ:AAPL). In our YSOT segment we answer a listener question on Chemtrade Logistics Income Fund (CHE.UN:TSX), which provides industrial chemicals and services to customers in North America and the World. The company looks to have an attractive dividend yield of over 13%, but it was recently cut. We let you know if it is sustainable. Our Dog of the week is CloudMD Software & Services (DOC: TSX-V), a company which is helping digitize the delivery of healthcare by providing patients access to all points of their care from their phone, tablet or desktop computer. The stock is down 35% from its October high of $3.20 per share. We let you know why.
This week we start with a Case for Debate on a unique Canadian Small-Cap Quarterhill Inc. (QTRH:TSX), in our YSOT segment we answer a listener question on Chemtrade Logistics Income Fund (CHE.UN:TSX) & Our Dog of the week is CloudMD Software & Services (DOC: TSX-V).
Discussion: National Post Article
Mind-blowing Liberal spending spree a massive rip-off of future generations
The idea of “Pre-Loaded Stimulus” is one of the more ridiculous things I have heard. Finance Minister and deputy Prime Minister Chrystia Freeland has been openly talking about this.
Firstly, the notion that this was in anyway planned is frankly silly. To think that Trudeau and his Cabinet were sitting there as the Pandemic hit saying, you know what we need to do? Let’s print a bunch of money, take on historic debt levels, give many in the public too much money in an effort to “pre-load” their wallets with cash to be used to bring us out with a vengeance on the other side. Ridiculous.
Second, now they want Canadians to start spending – Chrystia Freeland actually went on BNN Bloomberg and asked viewers to suggest some possible ways to unleash what she called the massive mountain of excess cash some Canadian households and businesses are sitting on as a result of the pandemic. (I would call that savings Chrystia – so happy to know you want to get your hands on it!)
Estimates on how much money has been hoarded vary, with Deloitte Canada’s Craig Alexander saying savings could reach as high as $200 billion by the end of the year. With such astronomical figures, the federal government noted in its Fall Economic Statement that tapping into these savings could help stimulate an economy that’s been hit hard by COVID-19.
“If people have ideas on how the government can act to help unlock that ‘pre-loaded stimulus,’ I’m very interested,” Freeland said.
I have a great deal of ideas and it does not have anything to do with Ottawa!
Quarterhill Inc. (QTRH:TSX)
Price: $2.67
Market Cap: $300.23 Million
Quarterhill is a Canadian company that focuses on intellectual property (IP) and the Intelligent Transportation Systems industry (ITS). However, its future seems to be increasingly tethered to its ability to successfully navigate mergers and acquisitions (M&A) as well as a substantial judgment in a lawsuit against Apple (NASDAQ:AAPL).
Case For:
#1: Strong Growth: Q3 revenues jumped 301% to $88.0 million, compared to $21.9 million in Q3 2019.
#2: Great Balance Sheet: Quarterhill has a fortress balance sheet with $135.7 million in net cash, or $1.14/share equating to 43% of its total market cap.
3#: Potential Cash Windfall: Additionally, the company’s WiLAN subsidiary was recently awarded a final judgment against Apple for US$108.98 million.
4: Low Valuations: On a trailing valuation basis with an excellent balance sheet, the stock looks cheap trading at just over 12 times reported earnings and with an EV/EBITDA ratio of 3.1.
5#: M&A Growth: The future looks bright with a large cash war chest, management is seeking cash producing tech forward businesses to increase the company’s recurring revenue base long-term.
Case Against:
#1: Lumpy Revenues – Limited Recurring Base: While revenues jumped 301% in the latest quarter, they remain roughly flat for the 9-month period just 6.1% were recurring and recurring revenue was actually down over the first 9-month of 2020.
#2: Profitability a Mirage: Profits were largely from the sale of a business unit and one-time licensing fees.
#3: Poor Management Track Record: While there is a huge cash balance assets are hardly cheap at present and management has shown little ability to purchase, integrate and grow recurring cash flow from acquisitions in the past.
#4: Operationally, the business is barely profitable. The Intelligent Systems Division made roughly $0.044 for the nine-month period and operationally the stock trades at 50 times earnings – with corporate costs the company lost money operationally. Plus, Apple has appealed the Cash Award!
Your Stock Our Take
Troy via Email
Chemtrade was promoted as a solid dividend income producer in a stable boring industry by another stock picking service. I am enjoying the monthly income even though the share price was cut in half – what are your thoughts?
There is a lot of news about “redemption of convertible unsecured subordinate debentures”, can you explain what this means?
Chemtrade Logistics Income Fund (CHE.UN:TSX)
Current Price: $5.49
Market Cap: $516 Million
Yield: ~11.6%
What does the company do?
Chemtrade Logistics Income Fund provides industrial chemicals and services to customers in North America and the World. The company has three business segments:
- Sulphur Products & Performance Chemicals (SPPC) – comprising 30%
- Water Solutions & Specialty Chemicals (WSSC) – 35%
- Electrochemicals (EC) – 35%
Key Points:
The company is considered an essential service and actually has a trailing yield of about 13.7% but in March of this year the company cut its distribution by 50% because of the uncertainty surrounding the COVID-19 pandemic. Which is understandable but not a great signal from management.
To answer Troy’s question on the redemption of its convertible debt – during the third quarter of 2020 Chemtrade redeemed its “2014 5.25% Debentures” at a total aggregate redemption price of about $100 million, which is equal to the principal amount of the debentures redeemed. The company funded this redemption with funds from its 2020 8.5% debentures as well as its existing credit facilities. So essentially all this means is the company is refinancing its older debt with new debentures and existing credit facilities. So, nothing to be too concerned about.
Recent Financial Results: (Q3, 2020)
- Revenue has decreased during the COVID-19 Pandemic. Decreasing 12.5% to $350 million compared to the same quarter last year.
- TTM Adjusted Funds from Operations (AFFO) was ~$161 million, a decrease of 8% from the same twelve trailing month period last year.
- Currently the company is trading with a trailing EV/AFFO multiple of ~12x. Which I would say places the company fairly valued to slightly overvalued considering the decrease in the company’s growth rate (its lack of growth in the past) and recent cutting of its dividend by 50%.
- A TTM Payout ratio of 49% out of AFFO which is healthy.
- Looking at the balance sheet it is pretty levered:
- Net Debt-to-EBITDA multiple of 4.8 times
- D/E ratio of 2
Guidance
- The company pulled its outlook for the year but in summary management said that its operating segments should generate similar revenues to that of 2020.
Conclusion:
First off, I can see why Troy likes the company as it pays an attractive yield which appears sustainable at its current level. But I can say that it is certainly a dividend stock and not much of a growth stock, as even in a normalized environment revenue had been decreasing. So right now, considering its EV/AFFO multipole of 12x and its lack of growth the stock trades near or slightly above fair value.
Regarding its recent debt redemption, the key takeaway here is that the company appears to be refinancing at a higher rate considering that it is funding some redemption with 8.5% debentures, showing that the company’s financial position has decreased since issuing its 5.25% debentures in 2014 and has less favourable access to capital. And on that note, the company is highly levered as both of its leverage ratios are higher than I would personally like to see and would be something to keep an eye on. But by no means do I think the business is in imminent trouble.
So, all in all, for the dividend I believe the stock is attractive, but considering KeyStone is primarily looking for dividend growth stocks, it is not a stock that we would recommend at this time.
Weekly Dog
CloudMD Software & Services (DOC: TSX-V)
Current Price: $2.05
Market Cap: $336 million
What does the company do?
CloudMD Software & Services Inc. (DOC:TSX-V) is a company which is helping digitize the delivery of healthcare by providing patients access to all points of their care from their phone, tablet or desktop computer.
Key Points:
This is an ehealth company, ehealth has obviously been a very hot theme in the wake of the COVID-19 pandemic. One of the silver linings of a tragedy like COVID is that it forces us to examine how key sectors like healthcare operate and look for way to make them more efficient and able to respond to future emergencies.
We had DOC as a Your Stock Our Take back in July. At the time, the stock was almost brand new to the markets and for the first few months after becoming public, the stock was on a tear. However, recently this strong trend has reversed, and the stock is down 35% from its October high of $3.20 per share.
Recent Financials:
- Q3 financial results were released on November 30th.
- The company reported record revenue of $3.4 million, compared to $2.2 million in Q3 2019, an increase of 55%.
- The revenue generated from Software-as-a-Service (SaaS) model digital services was $0.5 million compared to $0.4 million in Q3 2019, an increase of 22% primarily attributable to organic growth.
- Net loss and comprehensive loss in Q3 2020 was $2.7 million or $0.02 per share, compared to $0.8 million or $0.01 per share in Q3 2019.
- During the quarter, DOC announced seven acquisitions adding approximately $19 million to revenue.
- The company also believe that it is on track for an annualized revenue run rate of $50 million and improved adjusted EBITDA.
Conclusion:
It appears that the company was able to report some positive developments in Q3 but unfortunately this has not helped the stock price. The key metric we are looking at to validate the busines model is profitable and we don’t see any clear signs that this will be achieve in the foreseeable future. The revenue growth is fantastic and the target of $50 million in annual revenue is compelling. The problem however is that higher revenue will not necessarily translate into better profit margins. We will also note that the SAAS subscription revenue was only about 15% and grew at half the rate of total revenue year over year. It’s the SAAS revenue is what we are paying close attention to, as it is higher margin and really where software investors will assign a sustainably high valuation multiple. We certainly like the long-term potential of the ehealth space but we believe that the majority ehealth companies are still yet unproven and therefore very high risk.
It’s not investable at this time,
but we do monitor it very closely
