KeyStone’s Stock Talk Show, Episode 189

Great to be back with you this week. We will start by covering a few topical stories including RBC’s $13.5 billion agreement to acquire HSBC Canada. In our client chat session, a week ago, we fielded a question about which sectors or industry is best to invest in during an inflationary and/or rising interest rate environment – Brennan will explore this on today’s show and we will discuss. In our YSOT segment we take viewer questions on three stocks. This first, Zoom Video Communications, Inc. (ZM:NASDAQ), which was essential infrastructure during the pandemic but has since declined 85% from its highs. The company recently released Q3 financial results and we will review the performance to find out if this U.S. technology juggernaut is a current opportunity for investors. The second company, Ceapro (CZO:TSX-V) is a Canadian biotechnology company that develops technologies to extract active ingredients from oats and other renewable plant resources. The profitable micro-cap is up year-to-date as it has produced record EPS. The listener asks if the EPS growth is sustainable and if so, is Ceapro and underfollowed opportunity. The third is Voxtur Analytics Corp. (VXTR:TSX-V), a real estate technology company which offers targeted, data and analytics to simplify tax solutions, property valuation, and settlement services through the lending lifecycle for investors, lenders, government agencies and services. The stock is down 78% year-to-date and a listener asks us if the huge drop is an opportunity or whether this dog will continue to bark.

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

Royal Bank of Canada’s (NYSE:RY) proposed C$13.5B acquisition of HSBC’s (NYSE:HSBC) Canada operations, is the biggest Canadian bank deal in years.

According to Reuters, Canada’s Big 6 Banks control ~80% of total banking assets in the country.

By comparison, U.S.’s banking industry is much more fragmented. The five largest banks in the U.S. control ~40% of American assets, according to Reuters’ data.

Outside of the Big 6, HSBC Canada is one of the larger Canadian banks – so this deal, if it moves forward leads to further consolidation and further market share by the Big 6.

That alone is likely to have Canadian regulators looking closely at the deal in a country where the banking industry is already highly concentrated, and RBC is its biggest lender.

Chatter: Canada’s government has been vocal about its opposition to industry consolidation. If the regulators require RY to divest some assets, that could spell trouble for the deal.

Your Stock Our Take

Ceapro Inc. (CZO:TSX-V)

Price: $0.69

Market Cap: $52.41 Million

Yield: n/a

Company Description: Ceapro (CZO:TSX-V) is a Canadian biotechnology company that develops technologies to extract active ingredients from oats and other renewable plant resources. The company develops and commercializes natural products for personal care, cosmetic, human, and animal health industries using proprietary technology, natural, renewable resources, and developing innovative products, technologies, and delivery systems.

Q3 2022 Results

Q3 2022 revenue dropped 15% to $3.85 million. The decrease was primarily driven by a 17% decrease in product sales volume over the comparative quarter due to lower sales of the company’s flagship product avenanthramides. Sales of avenanthramides were lower due to the timing of customer orders.

The company was hit by a double whammy (and yes, that is a technical financial term we use all the tie) 1) revenue decreased, 2) cost of goods sold increased by 12%.  This resulted in a decrease in the gross margin percentage from 65% in the prior quarter to 54% in the current quarter.

Net income was basically flat at $862,000 or $0.01 per share versus $875,000 or $0.01 per share in Q3 2021. For the fist 9-months of 2022 earnings jumped 119% to $4.52 million from $2.07 million in the same period of 2021.

We monitor the company which trades at reasonable trailing valuations – one of our concerns for the quarter and near-term was the company had used up all the work in progress that had been manufactured with the higher yielding grain and so the work in progress used to produce finished goods did not generate as significant a benefit from the high output.  They had benefitted from this in Q1 and Q2.

Balance Sheet: Ceapro has an excellent balance sheet for a company of its size with $12.91 million in cash against $2.5 million in lease liabilities for a net cash position of ~$10.4 million which is 20% of its market cap.

Valuation: The company trades at a price-to-earnings ratio of 10 times, a price-to-FFO ratio of 6.5 times, and an enterprise- value-to-EBITDA ratio of 6 times.

Our Take: The company has a clear pipeline of future products which could lead to a step up in growth, but the risks that they do not make it to market as well. While driven by R&D and product development, the company has an existing profitable business which a great balance sheet which is a start. Historically, the revenue trend is an upward trajectory with decent, but no spectacular growth and lumpiness on a quarter-to-quarter basis. The current year is a step up in terms of profitability and tracks well in our models, but we expect the company will post compressed earnings in the fourth quarter compared to Q1 and Q2 as it is impacted by rising grain prices and increased research and development costs. The grain prices have moved lower but heightened development costs remain – good for the future potentially but the company will also face strong comparable EPS numbers to start 2023. As such, while we see value on a trailing basis and certainly rank Ceapro above most Canadian biotech companies, we choose to monitor the business given the near-term headwinds on the existing core business in terms of profit margins year-over-year.

Your Stock Our Take


Voxtur Analytics Corp. (VXTR:TSX-V)

Price: $0.24

Market Cap: $128.94 M.

What does the company do?

Voxtur Analytics is a real estate technology company. The company offers targeted data and analytics to simplify tax solutions, property valuation, and settlement services through the lending lifecycle for investors, lenders, government agencies and services. The stock is down 78% year to.

Recent Financials: The company recently released Q3 earnings. Management highlights that revenue was strong on a year-over-year increasing 44% year-over-year, and gross profit increased 42% year-over-year. But, it is a different story quarter over quarter; revenue dropped 7% over the last quarter, the second quarterly decrease in a row. Gross profit did increase 7% for the quarter but is still lower compared to Q1.

Management is forecasting revenue to be in the range of 140 and 150 million,  which does not include its recent acquisition of BlueWater. This means Q4 revenue would be between 25.5 million and 35.5 million, another significant revenue drop for the core business.

You can, of course, attribute the slowdown in revenue to the slowing housing market, but investors need to be cognizant that the high growth seen last year has stopped.

Net income has been trending better over the past 12 months to a loss of only 1.7 million, an improvement from the same quarter last year’s loss of 3.6 million as well as a substantial improvement from Q4 2021, which was a loss of 12 million.

Adjusted EBITDA, on the other hand, is not consistently improving or getting worse. Adjusted Ebitda was a loss of 1.4 million, which is worse than the previous year’s $600 thousand loss but better than the previous quarter’s $4 million loss.

Balance Sheet & Liquidity: The company has had a significant shortage of cash, burning cash just to run operations, as well it recently took on $30 million US in debt to pay for its acquisition of BlueWater. The company did break the covenants of the $60 million credit line but the lender, BMO, waived the issue, meaning they aren’t going to accelerate collection. This is relieving for the short-term, but if the company continues to break covenants, BMO may accelerate the collection, which is allowed under the agreement or renegotiate a higher interest rate.

In addition to the debt issuance, the company has issued significant common shares to help fund its various acquisitions over the past 2 years. For example, the Blue Water acquisition was the $30 million cash raised from debt and common equity, adding 124 million shares, roughly a fifth of the issued shares. The shares weren’t all paid out at once but will be spread out for the following 16 quarters so that you will see a continuous dilution of the basic share count over that time period.

There is some positive news in the last quarter, the company became operating cash flow positive, even if ever so slightly at only $49 thousand. Additionally, BlueWater, before the acquisition, was cash positive and should be accretive, which will help pay off the lofty loan payments. However, the company itself does not expect to be free-cash-flow positive until 2024. Free cash flow is operating cash flow and cash used in investing for things like acquisitions.

Our Take: The company is too risky at this time to be investable. The company’s capital structure carries significant risk due to the debt levels as well as impending dilution. Revenue growth has stalled out in the harder real estate market. While there is a glimmer of hope in an ever so slightly positive operating cash flow, it is not enough for one quarter to be, in reality, flat cash flow to resolve worries about its overall cash flows. Maybe in two years, after the real estate market has bottomed out and the major dilution is through, you could consider it, but for now, I would stay far away from Voxtur.


Debt Sustainability in Rising rate environment

We got a question in one of our chat sessions the other day, which said, “which sector or industry is best to invest in during an inflationary & rising interest rate environment?”

Some analysts would say, utilities (because many of their contracts are indexed to inflation), or consumer staples, health care, and gold (all because of their defensive properties).

What we would say is – Don’t try to time the market with weighting to specific sectors. Rather have a diverse portfolio of stocks from many sectors. And make sure that you look at the balance sheet to ensure a business does not have too much debt, and if they are levered, that most of their debt is fixed rate rather than floating rate.

For example:

Stanley Black & Decker (SWK:NYSE) was a company that a client asked about in last weeks chat. And let’s take a look at whether this business would be a good company to invest in during a rising interest rate environment.

Looking at the balance sheet. The company has about $408.7M in cash, and $7.9B in debt… providing a net debt balance of about $7.5B.

But is this debt sustainable and is it primarily floating rate or fixed rate???

Regarding debt sustainability, the company has a net debt to adjusted EBITDA multiple of 5.1x, and a times interest earned ratio of approximately 3.2x.

Regarding whether its debt is floating rate or fixed rate:

  • The company’s $5.4B in long term debt is primarily fixed rate.
  • And looking at its $2.5B short term debt, it primarily bears interest at a floating rate. So if interest rates went up by 1%, we could assume that its interest expense would go up by approximately $25M.

Now we can also look at what U.S. rating agencies are saying about the company’s debt (Right from the 10-Q):

  • On its senior unsecured debt (S&P A, Fitch A-, Moody’s Baa1).
  • Commercial paper program (S&P A-1, Fitch F1, Moody’s P-2).
  • There were no recent changes to any of the company’s credit ratings, however Moody’s corporation changed the company’s outlook from “stable” to “negative” during the second quarter of 2022 and Fitch changed the company’s outlook from “stable” to “negative” during the third quarter of 2022.

So just by looking at the balance sheet, this is not a company that we would invest in during a time of rising interest rates. I could also elaborate that the company recently lowered its guidance, which also causes some concern for looking forward on the business.


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