KeyStone’s Stock Talk Show, Episode 183

Great to be with you – I am just a static image this week as I am coming from you live from the LD Micro Conference in beautiful LA – we will chat about the event next week as it is just kicking off. In our news of the week segment we look at an open letter to Zuck as Meta shareholders tell the founder to limit spending on the Metaverse, big Chinese Tech drops once again as Chinese President Xi (Shi Jingping) tightens grip on power, the UK getting a new Prime Minister and it is considered a market friendly choice, and comments from Former Bank of Canada Governor Stephen Poloz on walking the line between taming inflation and not crushing the economy. In our YSOT segment Aaron answers a listener question on Innergex Renewable Energy Inc. (INE:TSX) – an independent renewable power producer which develops, acquires, owns and operates hydroelectric facilities, wind farms, solar farms and energy storage facilities. The stock has pulled back quite a bit and has an attractive yield – the listener asks us if we see it as a buy at present?

In our Stars & Dogs segment, Brennan’s Dog of the week is PyroGenesis Canada Inc. (PYR:TSX) which designs, develops, manufactures and commercializes advanced plasma processes and sustainable solutions which reduce greenhouse gases (GHG) and are economically attractive alternatives to conventional “dirty” processes. His Star of the Week is Propel Holdings Inc. (PRL:TSX), online financial technology (or fintech) company, with a proprietary online lending platform.

Brett hits the mailbag this week and answers a listener question on Nuran Wireless Inc. (NUR:CSE), a leading rural telecommunications company that meets the growing demand for wireless network coverage in remote and rural regions around the globe.

I welcome my cohosts – Aaron, and the Killer B’s – Brennan & Brett.

Meta Shareholders Tell Zuckerberg to stop spending on the Metaverse

Shareholders are restless – Meta stock is down over 61% in 2022.

  • Altimeter Capital Chair and CEO Brad Gerstner, in an open letter to the company, said Meta has too many employees and is moving too slowly to retain the confidence of investors.
  • The Meta investor recommends a plan to get the company’s “mojo back.”
  • It includes reducing headcount expenses by 20% and limiting the company’s pricey investments in “metaverse” technology to no more than $5 billion per year.

At the end of the second quarter this year, Altimeter Capital held more than 2 million shares of Meta or roughly $259,860,000.

The letter is a vote of less confidence about the company’s ambitions in the world of virtual and augmented reality. Meta changed its company name from Facebook to better focus on its VR hardware and software and is spending $10 billion per year on the technology.

I would say the Zuckerberg would likely say that the letter is short-term thinking and Meta is thinking 10 years out.

TECH

Alibaba, Tencent shares plummet 11% alongside China tech stocks as Chinese President Xi tightens grip on power.

  • Shares of Chinese tech giants Alibaba and Tencent closed down more than 11%; search company Baidu was 12% lower while food delivery firm Meituan tanked more than 14%.
  • The moves come after Chinese President Xi (SHI) Jinping paved the way for an unprecedented third term as leader and packed the Politburo standing committee (his core circle of power) with loyalists.
  • Investors fear continuing strict policy that could hamper growth of tech giants and very few people who can challenge Xi’s policies, even those that are negative for growth.

Xi’s policies have not be considered market positive for big tech in China.

UK Bond Markets Rally after Rishi Sunak becoming PM (officially will be tomorrow)

U.K. bonds surged after Rishi Sunak emerged as the frontrunner to become prime minister, a candidate investors expect will restore credibility to economic policy making and help calm the nation’s rattled markets.

Having served as chancellor in the government of Boris Johnson, Sunak is seen as being better equipped to address the nation’s financial challenges. It is clear the Sunak is the market friendly choice and considered a relatively safe pair of hands in challenging financial times and the markets reacted positively.

Former Bank of Canada Governor Stephen Poloz saying the central bank doesnt need to crush economic growth to beat inflation

In an interview Thursday, Poloz – now a special advisor at law firm Osler – said that while there will be some painful side-effects to the inflation fight, a combination of prudent policy and consideration of the transitory inflationary effects of the war in Ukraine, could lead to a scenario where price pressures continue to abate without sending the domestic economy into a deep funk.

Quoting Poloz:

“It would be nonsense to crush inflation down to two per cent immediately since some of it is going to go away by itself, obviously it would be nonsense to just ignore it and hope for the best,” he said. “So somewhere in the middle is that sort of stagflationary some-of-this, some-of-that path, and there’s no painless way to get there because what has happened in Ukraine.”

We have something different planned for our Fall Webinars – we are doing our traditional series of 3 hour webinars which anyone can attend, but we are also offering special in-person 5-6 hour events with lunch and refreshments for VIP clients new and old in Vancouver and Calgary. Details in a moment.

Live DIY Stock Investing Webinar – “Build a Stock Portfolio During a Bear, Profit in the Boom”

Nov 2 7pm Pacific & Nov 8 – 7 pm Eastern

Who should attend:

Individuals or families who want further information on how to build a simple 15-25 stock portfolio, how to face a bear market, what types of stocks to buy and which to avoid, simple information on the pro’s and cons of GICs, bonds and other fixed income vs. dividend growth stocks all in an environment where interest rates continue to rise, a simple Starter Portfolio of 5-6 stocks including top dividend growth stocks, top recession resistant stocks, bargains appearing in U.S. technology, top gold related stocks and more.

  • 2022 Review & How to Position Your Portfolio for 2023 – Broad Risks & Opportunities? The 2022 drop in North American stocks marks the worst in 52-years – how did we get here and where are valuations today & the folly of macro Forecasting.

Nuran Wireless

We were sent in a question from Christian about Nuran Wireless, and they were wondering if it could be a potential disrupter like Blackberry or Shopify.

Nuran Wireless is trading at 0.64 under the Symbol N-U-R on the Canadian Securities Exchange. The company’s product is Networks as a Service or NAAS, the company researches, develops, manufactures and operates cellular network equipment, specifically radio access network equipment. The company is based out of Canada, and its primary operations are in Africa, including Cameroon, the Democratic Republic of the Congo; and recently installed its first site in South Sudan and has existing contracts for Namibia, Sudan and more African Nations and is looking at expanding into Latin American in the future.

The company is currently not profitable, so to evaluate the company, you need to compare its potential versus the current and potential risks.

The company offers an extremely cost-effective way for rural and undeveloped regions of the world to access cellular networks.

Nuran has a goal of achieving 10,000 sites by 2026, of which it currently has contracts for 4,124. The company currently has 101 live sites and expects 400 live sites by the end of the year. Some rough math, using the midpoint of the 2 most recent contracts, the average revenue per year per site is 20,000 USD, which would mean if the company achieves its 2026 goal of 10,000 sites, it would result in a 2026 forward yearly revenue of 200 million USD. Quite high for a company with a market cap of 21 million Canadian; this is because there is significant risk embedded in the company’s operations.

Nuran is operating in high-risk countries, like South Sudan, which was in a state of civil war from its initial sovereignty in 2011 to 2020, with intermittent clashes still ongoing between the various groups. Severe conflicts can and will produce negative externalities, causing corporate operations in an area to be hindered and completely stopped; whether something like this will hinder Nuran is just speculation, but being conscious of the regional risk is important.

Another significant risk is counterparty risk. Currently, the lion’s share of Nuran’s planned expansion is attributed to contracts with two companies, MTN and Orange, under their various subsidiaries. If either of the companies has its own issues or relationships between them and Nuran breaks down, the growth of Nuran would be significantly slowed.

Nuran is also needing to raise capital for its operations as it doesn’t have cashflows to cover the initial building and operations of sites. It has had access to some funding from public development funds, including the European Investment bank, which is beneficial, but the company may need to dilute equity more, which it has in the past if it is unable to acquire external funding.

And lastly, just on the Christian’s disrupter comment, I wouldn’t call them a disrupter as they aren’t disrupting existing structures but creating a new one, so I would call them innovators, just not disrupters, at least not yet. What

The Dog of the week is: Pyrogenisis Canada Inc. (PYR:TSX)

Down 72% year-to-date, 40% in the last month, and 10% last week.

And its currently trading at:

Price: $1.08

Market Cap: $187 million

Description: PyroGenesis designs, develops, manufactures, and commercializes plasma processes and systems in Canada which are geared to reduce greenhouse gases (GHG).

It offers:

  • DROSRITE, a process for enhancing metal recovery (aluminum and zinc industries)
  • PUREVAP, a process to produce high purity metallurgical and solar grade silicon from quartz; and PUREVAP Nano Silicon Reactor, which is designed to transform silicon for use in lithium-ion batteries.
  • The company provides plasma torches for replacing fossil fuel burners.
  • It offers plasma arc waste destruction systems for waste destruction.
  • Further, the company provides engineering and manufacturing expertise.

Driving the decline: Is a decline in the company’s revenue for Fiscal 2022, with revenue down 29% from Q2 2021 – and both Adj. EBITDA and net income remain negative. Plus, on October 19th, 2022, the company announced a private placement issuing an additional 1.0M shares, as the company’s strong cash position (which we have monitored) has now crept into a net debt position in the last quarter of ($6.2M), and is down from a net cash position of $6.7M in Q4 2021.

Pyrogenisis is a company that we have talked to in the past, and the business looks like it has potential. But considering the decline in revenues, its inability to generate profit, the fact that it continues to trade at 7x trailing sales, and the need for additional equity raises to maintain the health of its balance sheet – the stock has declined 80% from its 52-week highs and has claimed our not so coveted spot of Dog of the Week.

The Star of the week is: Propel Holdings (PRL:TSX)

Gained approximately 19% in the last 5 trading sessions and is up 18% in the last month… although the stock is still down 35% YTD. But it has performed well in the last week.

Where it now trades at:

Price: $8.59

Market Cap: $286 Million

Yield: 5.2%

Description: 

Propel Holdings Inc. operates as an online financial technology company (Fintech). The company’s online lending platform facilitates access to credit products, such as installment loans and lines of credit under the MoneyKey and CreditFresh brands to American consumers. It also offers marketing, analytics, and loan servicing services.

Driving the share price Gains: Is the recent announcement (last week) on a 5-year agreement to become the Primary Lending Service Partner with a subsidiary of Pathward Financial (CASH:NASDAQ). The five-year renewable agreement contemplates fee income for Propel by providing white labelled technology and service solutions for Pathward’s consumer lending capabilities, including customer acquisition services, loan management software, risk and response scores, and credit servicing capabilities. Propel expects the program to launch by Q1 2023 and to be accretive to revenue and net income in 2023, with financial impact growing into 2024. The company noted that they will release more details in a future financial outlook.

Fundamentally the business has been performing well, with revenue up 90% in Q2 2022 over Q2 2021. Net Income was down about half a million to $2.0 million. On a trailing basis the company trades at approximately 48x earnings. (But it would be nice to see the company come out with their updated financial guidance so we can get an idea on the forward valuation). And in Q2 the company had a net debt balance of $67.4 million on its balance sheet.

So although the stock is down 35% YTD 🡪 its recent positive news and strong share price performance over the last week has allowed it to claim our coveted status of Star of the Week.

Your Stock, Our Take Innergex INE:TSX

Description:

  • Innergex Renewable is an independent renewable power producer, based in Canada.
  • The company’s assets consist of 3,582 MW of hydroelectric, wind, and solar facilities in Canada, the United States, France, and Chile.

 

(millions)20222021Change
Revenue$408,469$360,256+34%
Adjusted EBITDA$283,398$265,804+34%
Earnings per Share-$0.31-$1.01
Cash Flow per Share$0.43$0.24+79%

 

2022 Growth Targets
Production Growth22%
Revenue Growth25%
Adjusted EBITDA Growth25%
Free Cash Flow per Share$0.75
Free Cash Flow Growth25%
Leverage Ratios
Net Debt-to-EBITDA10 times
Debt-to-Equity4.3 times

 

Share Price$14.90
2022e FCF per Share$0.75
Price-to-FCF Ratio20 times

Pros

  • Long-term demand and growth of renewable power.
  • Stable, contracted cash flow.
  • Attractive yield of 4.9% and potential for annual dividend growth to resume.
  • Growth in per share cash flow has improved recently.

Cons

  • Poor track record of growth in per share cash flow.
  • High dividend payout ratio (currently) and no recent dividend growth.
  • High leverage on balance sheet (although not out of line with peers).
  • Valuation is not particularly cheap.

Our Take

  • Stable, renewable power company.
  • Own primarily for the dividend.
  • Should be able to produce growth over time.
  • Watch per share growth figures.


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