KeyStone’s Stock Talk Show, Episode 188
In our YSOT segment we take viewer questions on three stocks. This first, Neo Performance Materials Inc. (NEO:TSX), which manufactures and sells rare earth, magnetic powders, magnets, and rare metal-based functional materials in Canada and internationally. After a strong end to 2021, Neo is down 53% in 2022 and a listener ask us if the drop is an opportunity noting the stock pays a 4% dividend and is exposed to some high growth sectors. The second company, PowerBand Solutions Inc. (PBX:TSX-V), is a micro cap we have twice answered questions on in the past – each time warning listeners against the high valuations on the stock in the $0.60+ range. Today, with the stock cratering to $0.10, we answer another listener question on PowerBand, which states it has a comprehensive e-commerce solution transforming the online experience to sell, trade, lease, and finance vehicles. Brett will let you know how the company is progressing. The third is Shopify Inc. (SHOP:TSX), the Canadian-based e-commerce infrastructure provider. The listener notes the stock has cratered 72% YTD despite continued revenue growth and ask our take on the valuations of SHOP at present. Aaron gives you his take. Finally in our Star & Dog segment, Brennan’s Star is Starrex International (STX:CSE), which is up 21% in the week and is up about 61% in the last month. He will let you know what a company that provides real estate appraisal and credit reporting services to mortgage lenders and brokers in the United States, is performing so well in the current market conditions. His Dog of the Week is Bitfarms Ltd. (BITF:TSX), down 7% in the last week, 41% in the last month, and over 91% in the last year. Bitfarms is a global Bitcoin self-mining company, running vertically integrated mining operations.
I welcome my cohosts – Aaron, and the Killer B’s – Brennan and Brett.
Amazon plans to invest $1B a year in movies for theaters
Two-thirds of Americans (67%) are worried about inflation making it more difficult for them to buy the items they want. Even more (69%) worry a recession will limit their ability to make purchases. But anticipated cutbacks in spending among consumers are only up slightly compared to last year — 39% versus 36% — with the majority of Americans saying they expect to spend the same (44%) or more (14%) this year, according to the annual CNBC|SurveyMonkey Small Business Saturday poll.
Your Stock Our Take
Question: The stock is down 44% from recent highs in the $16.65 range and 53% on the year – there was strong earnings growth earlier in they year why is the stock selling off?
Neo Performance Materials Inc. (NEO:TSX)
Price: $9.32
Market Cap: $422.591
Yield: 4.06%
Company Description: Neo manufactures advanced industrial materials, magnetic powers and magnets, specialty chemicals, metals, and allows. Neo supplies products to the automotive, residential appliance, and media-storage industries. Neo has manufacturing facilities in ten countries and one research facility in Singapore.
The stock is down 53% year to date – why?
Q3 results swung to an unexpected loss:
- While Q3 2022 revenue increased 22.4% to $146.6 million.
- Operating income of $2.2 million in the quarter, lower by 82.2% year-over-year.
- Adjusted Net Loss of $1.9 million in the quarter, or $(0.04) per share.
Neo Performance had benefitted from the lead-lag impact in a rising price environment (bought inventories at lower prices – sells them at a higher price), prices have declined 30-40% from the peak, and as a result, the company is now selling its higher-priced inventory, and NEO’s EBITDA dropped substantially this quarter.
Recent News: On August 22, 2022, Hudson Resources Inc. and Neo announced that the parties have executed a binding agreement whereby Neo will acquire from Hudson an exploration license covering the Sarfartoq Carbonatite Complex in southwest Greenland. The project hosts a mineral deposit that is enriched in neodymium and praseodymium, two essential elements for rare earth permanent magnets
Neo is also pursuing plans to break ground on a greenfield rare earth permanent magnet manufacturing plant in Estonia that is intended to provide European manufacturers with the permanent magnets needed for electric and hybrid vehicles, wind turbines, and energy-saving electric motors and pumps. The Sarfartoq Project also is a key element of Neo’s “Magnets-to-Mine” vertical integration strategy.
The recent announcements may be long-term positives for the business, but they make a fundamental shift to vertically integrate the business from just a manufacturer of rare-earths to a producer with multiple plants in multiple geographies, which adds an element of risk in terms of execution and financing for the ambitious projects.
Conclusion:
At present, based on 2023 estimates, which factor in the normalization of prices, the company is trading at 3.2x EV/EBITDA, a discount to Rare Earth Producers at 13.1x, but also to Neo’s long-term historical average at 6.0x. If one believes in the plan and is looking to hold for 2-5 years, perhaps it is an option in this space, but execution risk has increased significantly as the company embarks on an ambitious plan to vertically integrate. The next quarter will likely face a similar pricing environment – as such, we plan to just MONITOR the stock at present and are not yet buying.
Your Stock Our Take
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Powerband Solutions Inc (PBX:TSX-V)
Price: $0.10
Market Cap: $29.727 M.
What does the company do?
Powerband Solutions Inc, Symbol P-B-X on the TSX-V, is a technology provider that is developing solutions for automotive and other industries that drive efficiency and transparency in the marketplace. Its DRIVRZ solution is a multi-dimensional marketplace platform, which provides consumers and dealers with streamlined buying and selling solutions.
The stock has had an extremely poor performance over the past year, trading for up to $1 at the start of the year down to the current $0.10 range. The collapse can be attributed to a few factors.
The first Factor is massive share dilution. The company had 137 million shares outstanding at the end of 2020, and by the end of 2021, the company had increased its share count to a whopping 198 million shares, a 44% increase, but that was not the end of it. The year hasn’t even come to an end, and the company now has 297 million shares outstanding, a 50% increase, in 11 months. The share dilution alone creates massive downward pressure on the share price, but there is more.
The need for cash has driven the massive dilution. Over the first half of 2022, the company has used $5.2 million for operating activities, operating activities are what is required to keep the company’s existing operations running. During the same period, the company issued $18 million in shares, leading to a final cash balance of $18 million. The company has issued shares past the quarter ended, which propped up the cash balance by $5.2 million.
Being cash-negative isn’t uncommon for young companies, but the expectation is they should be growing revenue at a high rate, which is the problem for Powerband; they haven’t been able to over the past few quarters. Revenue was growing up until Q3 of 2021 but has since fallen to $4.1 million in the last quarter, which is under half of what it was at its peak of $9.2 million for Q3 2021.
A significant reason why there is an overall shrinkage in revenue is that the overall used vehicle market has fallen roughly 16% in sales over the last year. Before the drastic fall, the company was seeing the opposite, very tight inventory of both used and new vehicles coupled with extremely high demand. Effectively the company had the best possible economic conditions to grow, but over the past year or so, while automobiles are not seeing the same glut of supply as other sectors, we have seen a shift away from consumers paying sky-high prices for any and all vehicles.
There is some hope, the company had a new board elected in May of this year and, in late September, announced major changes to the company. It is suspending the operations of DrivrzLane and only supporting the maintenance of DrivrzXchange to focus its capital the financing segment, DrivrzFinancial. The new management believes DrivrzFinancial has the highest near to medium-term return, while DrivrzXchange has potential long-term value.
These changes will alter the financials significantly but do not necessarily mean the company is saved or anywhere near investable; it’s still far off. Going forward, any investor or potential investor should be watching its cash flows. If cash stays on the current track of burning cash, you should be running away and not looking back. I’m not on the edge of my seat, expecting a turn around it’s unlikely to happen, and if it does, any existing shareholder capital could likely be diluted more on the way.
The Dog of the week is: Bitfarms Ltd. (BITF:TSX)
Down 7% in the last week, 41% in the last month, and over 91% in the last year.
Where its currently trading at:
Price: $0.80
Market Cap: $180 million
Description: Bitfarms is a global Bitcoin self-mining company, running vertically integrated mining operations with onsite technical repair, proprietary data analytics and company-owned electrical engineering and installation services.
Driving the decline: Is primarily the fallout in Crypto companies such as FTX and more recently, BlockFi, The troubled crypto firm which filed for bankruptcy in the US this week. BlockFi had already halted most activity on its platform, citing “significant exposure” to FTX and recently said it was seeking court protection to restructure, settle its debts and recover money for investors.
Plus, on Nov 14th, Bitfarm’s posted dismal financial results, with revenue down 26%, a Gross loss of -$3.9M and reported a net loss of -$84M or -$0.40 per share. But this was primarily due to a large impairment at their Argentina facility.
We actually included Bitfarms as a Monitor in one of our larger reports completed in early 2022 and in that report we said “Similar to a company that mines gold or has commodity exposure, Bitfarm’s revenue and profitability is fundamentally tied to the price of Bitcoin. Therefore, if Bitcoin performs well, Bitfarm’s stock will also likely perform well. The opposite is also true, as if Bitcoin performs poorly, Bitfarm’s stock will also perform poorly.”
Thus, with Bitcoin being down 66% YTD and Bitfarm’s stock coincidingly performing poorly with Bitcoin, it has claimed our not so coveted status of Dog of the week.
The Star of the week is: Starrex International (STX:CSE)
Gained approximately 21% in the week and is up about 61% in the last month.
Where it now trades at:
Price: $1.95
Market Cap: $30.7 Million
Description:
Starrex is a national provider of real estate appraisal and credit reporting services to mortgage lenders and brokers in the United States. It had essentially two segments, including:
- MFI Credit Solutions – Full service credit reporting agency with resources from all three national credit agencies (TransUnion, Equifax, and Experian).
- Property Interlink & Reliable Valuation – A full service appraisal management company for mortgage financing.
Driving the share price Gains: Is the recent announcement on November 8th, that the business closed the transaction selling its real estate appraisal management business (Property Interlink & Reliable Valuation Service). The net proceeds from the sale of the Business (after tax) and all expenses, including retention and change of control payments, are estimated to be US$6.2 million…
If we look at the first 6 months of this year, the subsidiaries they sold (Property Interlink & Reliable Valuation) consisted of approximately 75% of total revenue.. but this segment had slim to negative margins, while its MFI Credit solutions segment was generating net income margins of 3.3%.
Matthew D. Hill, President and CEO stated: “We are extremely pleased to have closed this transaction and appreciate the trust our shareholders have placed in the Management team to allow us to proceed with the transaction. We look forward to reporting on our efforts as we redeploy our capital in securing new opportunities in the real estate title industry and building additional value for the Company and our shareholders.”
Following the transaction, the company should have US$8M in cash to deploy and no debt. But its operations are changing significantly with the largest part of the business no longer there. The market seems to be excited about the company’s new direction, but we will have to wait and see what the company purchases.
PLUS, I want to note, this company is very thinly traded so it will likely remain volatile.
PowerBand PBX:TSXV
- Powerband Solutions Inc, Symbol P-B-X on the TSX-V, is a technology provider that is developing solutions for automotive and other industries that drive efficiency and transparency in the marketplace. Its DRIVRZ solution is a multi-dimensional marketplace platform, which provides consumers and dealers with streamlined buying and selling solutions.The stock has had an extremely poor performance over the past year, trading for up to $1 at the start of the year down to the current $0.10 range. The collapse can be attributed to a few factors.
- The first Factor is massive share dilution. The company had 137 million shares outstanding at the end of 2020, and by the end of 2021, the company had increased its share count to a whopping 198 million shares, a 44% increase, but that was not the end of it. The year hasn’t even come to an end, and the company now has 297 million shares outstanding, a 50% increase, in 11 months. The share dilution alone creates massive downward pressure on the share price, but there is more.
- The need for cash has driven the massive dilution. Over the first half of 2022, the company has used $5.2 million for operating activities, operating activities are what is required to keep the company’s existing operations running. During the same period, the company issued $18 million in shares, leading to a final cash balance of $18 million. The company has issued shares past the quarter ended, which propped up the cash balance by $5.2 million.
- Being cash-negative isn’t uncommon for young companies, but the expectation is they should be growing revenue at a high rate, which is the problem for Powerband; they haven’t been able to over the past few quarters. Revenue was growing up until Q3 of 2021 but has since fallen to $4.1 million in the last quarter, which is under half of what it was at its peak of $9.2 million for Q3 2021.
- A significant reason why there is an overall shrinkage in revenue is that the overall used vehicle market has fallen roughly 16% in sales over the last year. Before the drastic fall, the company was seeing the opposite, very tight inventory of both used and new vehicles coupled with extremely high demand. Effectively the company had the best possible economic conditions to grow, but over the past year or so, while automobiles are not seeing the same glut of supply as other sectors, we have seen a shift away from consumers paying sky-high prices for any and all vehicles.
- There is some hope, the company had a new board elected in May of this year and, in late September, announced major changes to the company. It is suspending the operations of DrivrzLane and only supporting the maintenance of DrivrzXchange to focus its capital the financing segment, DrivrzFinancial. The new management believes DrivrzFinancial has the highest near to medium-term return, while DrivrzXchange has potential long-term value.
These changes will alter the financials significantly but do not necessarily mean the company is saved or anywhere near investable; it’s still far off. Going forward, any investor or potential investor should be watching its cash flows. If cash stays on the current track of burning cash, you should be running away and not looking back. I’m not on the edge of my seat, expecting a turn around it’s unlikely to happen, and if it does, any existing shareholder capital could likely be diluted more on the way.
