KeyStone’s Stock Talk Podcast Episode 133
This week, we start by discussing the testimony from WallStreetBets, Reddit et all before the House Financial Services Committee on the GameStop issue.
Back by popular demand, we start with a Case For and Case Against debate on surging small-cap, Peak Fintech Group Inc. (PKK:CSE), a Fintech service provider to the Chinese commercial lending sector. Brennan argues the bull case, I crush him with the bear case, and Aaron sits in as judge, jury and executioner.
In our YSOT segment, Aaron answers a question on two REITs sent in by a listener. While both REITs, Granite Industrial REIT (GRT.UN:TSX) and BSR REIT (HOM.U:TSX) are not directly comparable, given that they operate in differing segments, Aaron lays out the valuations and some of the investment merits of each company.
Finally, Brennan answers a listener question on Tecsys Inc. (TCS:TSX), a great Canadian software success story, which provides supply chain solutions that equip organizations with services and tools designed to create clarity out of the complex supply chain challenges.
Peak Fintech Group Inc. (PKK:CSE)
Current Price: $2.87
Market Cap: $ 276.436 million
Peak Fintech Group Inc. is the parent company of a group of innovative financial technology (Fintech) subsidiaries operating in China’s commercial lending industry. Peak’s subsidiaries use technology, analytics and artificial intelligence to create an ecosystem of lenders, borrowers and other participants in China’s commercial lending space where lending operations are conducted rapidly, safely, efficiently and with the utmost transparency.
For Case (Brennan):
- Fintech stocks are hot right now, & Peak’s “Lending Hub Ecosystem” which brings together small businesses and lending institutions is like Uber for loans.
- Absolutely tremendous revenue growth – growing revenue at 235% this quarter over the same quarter last quarter and 187% TTM over TTM.
- Healthy cash rich balance sheet with approximately $3.4 million in net cash or about $0.04 cents per share.
- Although the company isn’t profitable on an earnings basis, it has posted positive Adjusted EBITDA over the last TTM at just under $1 million dollars and in earned $1.5 million in adjusted EBITDA for the 2019 fiscal year.
- Management provided 2020 revenue guidance of $40 million, which is an increase of 240% from fiscal 2019. And places the company at approximately 6 times forward revenue, whereas Fintech Peers are trading at 10-15 times revenue.
- Lastly, the company is looking to list on the NASDAQ or NYSE within next 6 to 12 months – which could increase the exposure of the story.
Case Against (Ryan):
- Huge growth, but zero profitability: $15 million in Q3 revenues but Peak still lost over half a million and only managed to post a $127,000 in adjusted profit, at less than half the margin than the preceding period.
- High valuations: Peak trades with a lofty EV/EBITDA multiple of 260.
- Huge regulatory risk in Chinese Fintech: Instructed by President (SHEE jin-PING) Xi Jinping, all three financial watchdogs have made it their primary goal this year to curb the “reckless” push of technology firms into finance – the IPO of the countries largest FinTech, Ant Financial was already pulled.
- Peak does not own one of its FinTech platform known as “Cubeler” – it has a 10-year agreement for exclusive rights to the platform in China.
- Finally, Historical accounting issues for China-based, North American-listed stocks: Brennan may be too young to recall, but in the past decade, there had been too many Chinese based businesses that have reported great numbers, but were later identified as misreported or outright fraud.
Your Stock Our Take
Stock Comparison – Granite Industrial REIT (GRT.UN) versus BSR REIT (HOM.U)
- Granite Industrial REIT (GRT.UN) owns industrial facilities globally. These include manufacturing facilities, primarily rented to Magna Corporation, and warehouse distribution facilities which are used for ecommerce. Granite pays a yield of 4% and has a market capitalization of $4.6 billion.
- BSR REIT (HOM.U) is an apartment REIT with properties located in markets within the Sunbelt region of the United States. BSR pays a yield of 4.7% and has a market cap of $324 million.
Factors to Compare
- Granite: In the most recent quarter, net operating income increased 28% to $77 million, same property NOI increased 3.2% and cash flow (FFO) per share increased 3.2%. For the year-to-date period, cash flow per unit was up 10%.
- BSR: In the most recent quarter, net operating income increased 4.8% to $15.2 million, same property NOI increased 4.9% and cash flow per unit declined by 9.9%. For the year-to-date period, cash flow per share was down 24%.
- Granite: The REIT has the lowest debt leverage of any REIT on the Canadian market. Debt to assets at the end of the last quarter was 29% and interest coverage was 8.8 times.
- BSR: Debt to assets was 51% and interest coverage of 2.2 times.
Distribution and Payout
- Granite: Distributions were increased 3.2% in 2020. This was the 8th consecutive year of distribution increases. The payout ratio to cash flow is approximately 50%.
- BSR: The REIT has a shorter history and has only been public since 2018. There have been no distribution increases in the company’s history. The payout ratio to cash flow is approximately 88%.
- Granite REIT trades at a valuation of approximately 20 times cash flow.
- BSR trades at a valuation of approximately 19 times cash flow.
Not comparing apples to apples, but you can see why we may prefer Granite as a REIT generally, versus BSR at present.
Your Stock Our Take
Kevin via Email – Just want your thoughts on Tecsys. It looks like a company with good potential as there is large insider ownership and seem to be expanding rapidly. Tecsys looks to be cash flow positive with a net cash position and a market cap of $589 million which could be a lot of room for growth as the market for supply chain management solutions for healthcare seems to be a good space to be in right now with the COVID factor.
Tecsys Inc. (TCS:TSX)
Current Price: $61.80
Market Cap: $945 Million
Dividend Yield: ~0.4%
What does the company do?
Tecsys is a global provider of supply chain solutions that equip organizations with services and tools designed to create clarity out of the complex supply chain challenges. Tecsys’ solutions include warehouse management, distribution and transportation management, supply management at point-of-use, distributed order management, as well as financial management and analytics solutions. The company sells its solutions primarily on a subscription basis as Software as a Service (SaaS) and also on a perpetual license basis with recurring support.
Recent Financial Results: (Q2, 2021)
- Revenues for the second quarter of 2021 were $30.7 million, $4.7 million or 18% higher compared to $26.0 million generated from the three months ended October 31, 2019. The year-over-year increase was primarily due to Cloud, maintenance and subscription revenue
- Adjusted EBITDA for the quarter reached $4.8 million, an increase of 29.7% from $3.7 million during the same quarter of 2019
- Net earnings were $2.1 million, an increase of 50% compared to $1.4 million for the same period last year.
- On October 31st the company had a net cash position of $10.6 million, or $0.74 per share.
- The company’s trailing EV/EBITDA multiple is approximately 68 times, which shows the company is quite expensive.
- No physical guidance
- Total annual recurring revenue on October 31, 2020 is $50.9 million, up 26% compared to $40.5 million on October 31, 2019
- Professional Services Bookings in the second quarter of fiscal 2021 were $11.5 million, up 19% compared to $9.7 million in the second quarter of fiscal 2020
Tecsys is a well-run business operating in the Supply Chain Solutions industry. The company has performed very well as of recent – growing both its overall revenues and recurring revenues, profitability, bookings and backlog at a great pace. Tecsys is certainly an attractive story as it has a good track record and operates in an attractive space but seeing that the company currently trades with an EV/EBITDA multiple of over 65 times, while generating top-line revenue growth of 18% the stock is priced to perfection. Therefore, at this time we do not see the company offering investors growth at a reasonable price and are keeping the stock on our monitor list.
To be frank – when I first came across this company in one of our market sweeps I was very excited, but really it just comes down to the fact that we have to pay up to take part in the stock which is keeping us on the sidelines.