KeyStone’s Stock Talk Show, Episode 204.

Great to be back again this week and joined by a fully recharged Aaron Dunn after his South American Salsa tour. This week, Aaron has a great segment for you and one that is music to my ears. This idea was taken from Warren Buffett’s 2022 Annual Shareholder Letter where Buffet explains how a dozen or so investments over 58 Years have generated the vast majority of his success – essentially a dozen investments or stocks have made him the greatest investor of all time. We will also be playing a clip from a recent interview I gave  on the Planet Micro-Cap Podcast that details a part of KeyStone’s research process – inspired by Buffett as well. In our YSOT segment Brennan tackles a question on K-Bro Linen (KBL:TSX), the largest owner and operator of laundry and linen processing facilities in Canada and a market leader for laundry and textile rental services in Scotland and the Northeast of England. Brennan updates the listener on the business which I reviewed a couple of months back after their recent quarterly numbers, a new acquisition, and whether management’s outlook for 2023 matches analysts expectations. Finally, Brett answers a listener question on Open Text Corporation (OTEX:TSX), which engages in the designs, develops, markets, and sells information management software and solutions. The stock has had a strong start to 2023, and Brett let’s you know if it is driven by the underlying fundamentals improving.

Let’s get to it.

We welcome back Mr. Aaron Dunn and, as always, the Killer B’s, Brennan & Brett.

Tell us about your trip Aaron…

Warren Buffett/ Keystone Investing Philosophy

I literally do a segment on how 2-3 stock investments in any investor’s lifetime can be game changing for your portfolio in many of the Webinars and presentations we conduct.

It is a point that most advisors will not tell you and, in fact, because of the manner in which most Canadian portfolio are structured, you have no chance even benefitting from these type of life changing investments.

There are more in our coverage that have posted 1,000 percent gains such as Ceramic Protection and Janna Systems for example, but there are many common themes with these stocks. First of, fundamentally, all were growing, trading at low valuations with good balance sheets and had solid to excellent growth paths ahead of them. Curiously, on initial recommendation, not a single Canadian brokerage, analyst firm or even boutique brokerage covered XPEL, Hammond Power or WaterFurnace and Boyd had basically one analyst covering the stock and it was soon discontinued at the time KeyStone originally recommended the stock.

Why? One could say it was because they were smaller – but that is not the real story – there are hundreds if not thousands of small-cap stocks covered each year in Canada. The real story is, they had strong balance sheets, and did not need any capital from Bay Street for the most part. Boyd has accessed convertible debt at some points, but on its own terms basically. If you do not need capital from Wall or Bay Street, they do not make money from you, so you are not covered. These are 4 of the best performing stocks in Canada over the past couple decades and they never made it into most Canadian portfolios because they would not make any money for the Big Banks – they would have made game changing differences in your portfolio, but that is not the Big Banks concern.

Now, identifying these types of game changing investments is the most difficult part, but it is not the end of your journey. Investors need to hold a couple of these stocks in their lifetime to truly make a difference to their wealth, but their portfolios much be structured to take advantage of these gains.

If you build your portfolio in the traditional model – with a big bank – you will hold 5-10+ mutual funds, each owning 100+ stocks and, if your advisor is adventurous, maybe you own 25+ individual stocks. Even if one of these stocks make it into your portfolio, through dumb luck, the likely are one of 100 or 500 stocks and compose less than 1% of your portfolio. They can increase 1000+%, which is good, but it will not generate game changing wealth in your portfolio.

So, your portfolio actually has to be structured well – we call for 15-25 stocks – that is the sweet spot, so that one of these game changing stocks, if in your portfolio, can make a significant difference.


YSOT revisiting – As Ryan covered the stock about two months ago, and following the release of its Q4 2022 results, the stock has declined about 11% so we thought we would revisit the story to see the business’ progress.

Slide 1

K-Bro Linen (KBL:TSX)

Price: $26.95

Market Cap: $290 Million

Dividend yield: 4.4%

Slide 2


K-Bro Linen is the largest owner and operator of laundry and linen processing facilities in Canada and a market leader for laundry and textile rental services in Scotland and the Northeast of England.

The company’s operations in Canada include nine processing facilities and two distribution centres in ten Canadian cities: Québec City, Montréal, Toronto, Regina, Saskatoon, Prince Albert, Edmonton, Calgary, Vancouver and Victoria. And the company’s operations in the UK across six locations.

For the most recent fiscal year, approximately 63% of its revenue came from its Healthcare Segment, while 37% came from the Hospitality segment. And as you can see from the table that I have up on the screen, the business’ Hospitality Segment took a massive hit in 2020 & 2021 because of the pandemic. But with the world reopening, the hospitality segment is finally back to its pre-pandemic highs.

Slide 3

Operational Updates:

On March 2, 2023, the K-Bro announced the closing of a share purchase agreement to acquire all the assets of a private laundry and linen services company incorporated in Canada and operating in Quebec City, for total consideration of $11.5 million and a potential earnout of $1.9 million. The purchase price will be satisfied by drawing down on the corporation’s revolving credit facility.


Slide 4

Recent Financials (Q4 2022)

  • Revenue for Q4 2022 was $70.7M, an increase of 13.6%, driven primarily by a further recovery in its Hospitality segment.
  • EBITDA was $8.7M, a decrease of 2% from the same period last year. And EPS was $0.026, a decline of 82% from $0.14 generate in Q4 of 2021.
    • The decline in EBITDA and Net Income were primarily due to temporary labour inefficiencies resulting from competitive labour markets in certain cities, higher natural gas rates, higher delivery costs related to increased diesel rates, and lower government assistance received. Margins were also impacted by the Alberta Health Services transition and the repricing of the corporation’s existing business in Edmonton and Calgary with AHS which took effect on August 1, 2021, in advance of the business being fully transitioned.
  • As of December 31, 2022, K-Bro held $2.6 million in cash and Debt & leases of $98.8 million, providing a net debt position of $96.2 million and a trailing net debt to EBITDA multiple of 2.6 times. (Keep in mind this is pre the March acquisition).
  • Valuation metrics – Trades with a trailing price-to-earnings multiple of 74 times and an EV/EBITDA multiple of 10.6 times.

Slide 5


  • Current trend towards loosening restrictions on international border crossings and increasing business/leisure travel will continue to support the strong recovery momentum in hospitality revenues.
  • Into 2023, management will continue to focus on optimizing plant efficiencies associated with the transition of new AHS business.
  • Since March 2022, KBL has faced significant volatility in energy costs due to current geopolitical issues. And in April 2022, to mitigate this instability, the company locked in natural gas supply rates in the UK until December 2024. Based on these locked in rates natural gas as a percent of revenue has increased approximately 2.5% from historical levels for 2022. As they move into 2023, they expect to mitigate these cost increases with price increases to its customers.
  • KBL continues to face temporary labour inefficiencies from competitive labour markets.
  • Management is confident in their ability to return to 2019 margin levels, which is anticipated to occur in the latter half of 2023.

Slide 6

We spoke with management late last year, and at that time we saw estimates from analysts which seemed “out to lunch”. And even Linda, the CEO told us that she believed a recovery was going to take a little bit longer than the analysts had indicated in their reports.


To conclude, I like K-Bro Linen, and its not just because they operate in all 3 primary cities in Saskatchewan. The company pays a nice dividend yield, they are profitable, but right now, the business is just a bit pricey for us and we would like for the company to have a further share price pull-back before we would potentially recommend the stock to our clients.



OpenText Symbol O-T-E-X on the TSX currently trades at $51 up roughly 25% year to date, a market cap of just under $14 Billion and pays a dividend yield of 2.5%.

OpenText describes itself as the leader in a $92 billion and growing Information Management market, delivering a compelling cloud-based platform of software and solutions that uniquely positions OpenText to win customers and continue to take market share, regardless of the economic environment. OpenText has five cloud segments, Content Cloud, Business Network Cloud, Experience Cloud, Security and Protection Cloud and Developer Cloud.


First, looking at the income statement for OpenText’s most recent quarter, fiscal Q2 2023. The company reports in US dollars.

  1. Total Revenue was up 2.4% to $897 million and 7.8% growth on a constant currency basis.
  2. Annual Recurring Revenue or A-R-R was up 3.6% to $725 million, and 8.7% growth on a constant currency basis.
  3. Adjusted EBITDA was down 0.8% to $340.9 million.
  4. GAAP Net Income was up 192.7% to $258 million. But this was largely due to $172 million of unrealized derivative gains relating to their acquisition of Micro Focus. Removing just that single unrealized gain which is effectively just an accounting number, Net income fell 2% to 86.5 million.

Overall, we’re seeing a shrinking bottom-line but we are seeing revenue metrics with minor growth. The constant currency revenues are higher growth as the US dollar which OpenText reports in appreciated against effectively every currency in 2022.


Before we move to the balance sheet I’m going to take a quick detour at management expectations, as the performance will be significantly altered due to the acquisition of Micro Focus.

  1. For Fiscal 2023 the company expects 28 to 30% revenue growth with only 1 to 2% from organic. The difference is due to the company’s core operations of being a software acquirer. Much of the software and companies they acquire are already in the mature stage of growth so little or no organic growth occurs.
  2.  Aspirational targets in Fiscal 2026 having total and organic growth of 2 to 4%.
  3. The company does expect to be able to increase its adjusted EBITDA margin, forecasting 32.5% to 33.5% for fiscal 2023 and 38% to 40% aspirational margin in fiscal 2026.

So, this clearly states management does not expect great organic growth going forward and expects to deliver value through margin expansion.



As at the end of Q2, 2023, OpenText has cash and equivalents of $2.82 billion and total debt & leases of $5.45 billion resulting in a net debt position of $2.63 billion. Using trailing twelve months adjusted EBITDA we get a Net Debt to Adjusted EBITDA ratio of 2.1 times. This ratio is quite high but expected given the history of acquisitions.

However, debt is going to go higher, as the company finalized its acquisition of Micro Focus on January 31st, after the quarters end. Debt is expected to be at $9.3 billion excluding cash with a weighted average interest rate of 6.3%, and a bank covenant net leverage of 2.8 times and half of the debt being fixed. Given the acquisition price was $5.8 billion we can add that to net debt giving a rough pro-forma net debt position of $8.4 billion.

The company does expect to start paying down debt by a minimum of $175 million starting by the end of fiscal Q4 2023.

5) Valuation

Using pro-forma estimated numbers forward fiscal 2024 EV/EVBITDA is 8.5 times. It is better than the trailing EV/ adj. EBITDA of 12.4x but this makes sense as it is forward, as well they purchased Micro Focus for 6.7x which lowers it as well synergies would increase EBITDA more lowering the forward multiple. That being said, this is still an expensive multiple given the low expected growth once the integration of the companies is completed.

Overall, the company is significantly leveraged going forward having significant interest rate risk and still trades at a pricey multiple given the organic growth.


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