KeyStone’s Stock Talk Show, Episode 206.
Great to be back with you this week with another busy show. Aaron starts us off quick summary on 5 five interesting earnings releases over the past week as we head into Q1 earnings season including reports from DLocal Limited (DLO: NASDAQ), Intouch Insight (INX: TSX-V), Richardson Electronics (RELL: NASDAQ), MSC Industrial Supply (MSM: NYSE), and Science Applications International (SAIC: NYSE). In our YSOT segment, I will answer a viewer question on Newport Exploration Ltd. (NWX:TSX-V), holds royalty interests in producing oil and gas permits in the Cooper Basin, Australia, an, d a mining project in British Columbia, Canada. The viewer asks us if the micro-cap, which pays a dividend in the range of 15% at present, offer value. Brennan answers a viewer question on Canadian Western Bank (CWB:TSX) which provides personal and business banking products and services primarily in Western Canada with about 63% of its loan portfolio in BC and AB. And last, but certaintly not least, Brett answers a viewer question on Keysight Technologies (KEYS:NYSE) is a leader in the field of testing and measurement, helping electronics OEMs and suppliers alike bring products to market to fit industry standards and specification. While the stock has outperformed the market over the past year, it dropped significantly in February, Brett will give you his take on why.
Let’s get to the show….I welcome my cohosts – Aaron, and the Killer B’s – Brennan and Brett.
Newport Exploration Ltd. (NWX:TSX-V)
Market Cap: $26.39 Million
Company Description: Newport holds royalty interests in producing oil and gas permits in the Cooper Basin, Australia, and a mining project in British Columbia, Canada. Revenues currently come from a2.5% GOR over licences in the Cooper Basin, Australia, operated by Beach. There is no time limit or expiry date on the GOR assets, and no cost to the Company to retain them.
However, Newport has no control over operating decisions made by Beach. Accordingly, this prevents the company from commenting on Beach’s operating plans going forward – essentially providing no guidance with zero control of their only cash producing asset. The company goes so far to recommend that shareholders and potential investors access material information relevant to the company as released independently by Beach and Santos Ltd in order to keep current during exploration, development and potential production of all the licences subject to the Company’s GOR.
Newport’s mineral exploration project is the Chu Chua property (Chu Chua), located in central
British Columbia, Canada. We would assign limited value to this asset.
Financials & Balance Sheet:
During the three months ended January 31, 2023, Newport reported:
- Royalty income of $1.4 million down substantially from $2.49 million in the same quarter last year as a result of a decrease in oil sales.
- net income of $814,119 compared to net income of $1,382,274 during the three months ended January 31, 2022 (the “comparative period”).
Royalty income is based on production volumes and oil prices – both were lower year over year.
On December 12, 2019, the company announced a quarterly ‘fixed distribution’ dividend of
$0.01 per share commencing March 2020, with subsequent dividend payments every three
months. The company reserves the right to change the dividend payment from time to time and has and will likely continue to overtime.
The company will have approximately CDN$3.4 million in its Treasury, and no debt.
Newport could be a unique way to play higher oil prices and could continue to pay a very strong dividend if the operator (Beach) continues to drill and bring on further wells that are under the company’s Gross Operating Royalty. However, as we and the company have stated both energy prices and Beach’s capital expenditure in terms of future drilling plans are uncertain. We do note that over the past year the primary field which provides Newport its cash flow has seen higher decline rates.
We have interviewed management and, to be blunt, Newport appears to be a junior resource company that hit a lottery ticket type win with its royalty property and does not seem to be team that is operating a sustainable model to seek out other profitable royalties or invest the cash flow in any sustainable growth initiatives. They will ride the cash flow from their existing royalty which can provide a strong dividend, but they have no control over the continued operation of the underlying assets, so it is not a structure that would fit our criteria.
Canadian Western Bank (CWB:TSX)
Market Cap: $2.3 Billion
Dividend yield: 5.3%
Canadian Western Bank (CWB) provides personal and business banking products and services primarily in Western Canada. (With about 63% of its loan portfolio in BC and AB – as shown in the slideshow).
The banks offers:
- Savings, cash management, US dollar, and chequing accounts, as well as organization, business trust, and trust fund investment accounts.
- It also offers commercial lending and real estate, and equipment financing and leasing products; agriculture lending products; mortgages; lines of credits; registered retirement savings loans; consolidation, and vehicle loans; and credit cards.
- Life and disability insurance products; and ATM, mobile, and online banking services, as well cheque order services.
- Further, it provides investment products comprising GIC’s, US dollars investments plans, registered retirement income funds, tax-free savings accounts, registered education savings plans, and mutual funds, as well as personal and business planning services.
CWB’s Loan Portfolio:
- Commercial loans and mortgages make up about 55% of the portfolio.
- Personal loans & Mortgages make up about 20%.
- Equipment Financing & Leasing make up 15%.
And just for fun I thought that I would include TD and RBC’s loan portfolios as well as their Capital Adequacy ratios just so that those who are watching on Youtube can get a sense of where the largest banks in Canada are at in comparison to CWB.
So looking at the banks’ capital adequacy ratios, they are all well above the requirements of the Basel III framework. Total capital ratio at 12.8% (above the 8% requirement), Tier 1 Capital Ratio at 10.9% (above the 6% requirement) and CET1 at 9.1% (above the 4.5% requirement).
But just a simple conclusion that I would take away is that CWB has a significant portion of its loan portfolio in commercial loans and mortgages. And its capital adequacy ratios are lower than that of both the large banks – which is expected.
Recent Financials (Q1 2023)
- Revenue for Q1 2023 was $272.9M, an increase of 3% from Q1 2022, driven by an increase in the loan portfolio.
- Net interest income increased 4% compared to the same quarter last year which reflected the loan growth, partially offset by a 15-basis point decrease in net interest margin. The decline in net interest margin reflects the impact of lower loan related fees, including payout penalties, a proportional shift in the banks’ funding mix towards fixed term deposits and asset yields that have lagged the growth of deposit costs through the rising interest rate environment.
- Net income to common shareholders was $94.4M or $0.99 per share, an increase of 7.8% from Q1 2022.
- Valuation metrics – Trades with a trailing price-to-earnings multiple of 7x. Which compares to TD which trades at 9.6 times earnings and RBC which trades at 12.4 times.
Looking forward for growth and management’s tagets…. Loan Portfolio is expected to be high single-digit growth and Adj. EPS is supposed to be in the low-to-mid single-digit growth rate.
— Stocks that trade at around 10 times and are looking for Adj. EPS growth at a significantly higher rate than that of CWB.
Question from Ronen,
Keysight Technologies symbol KEYS:NYSE is a leader in the field of testing and measurement, helping electronics OEMs and suppliers alike bring products to market to fit industry standards and specifications. Keysight specializes in the communications market, but also supplies into the government, automotive, industrial, and semiconductor manufacturing markets. Keysight’s solutions include testing tools, analytical software, and services.
The stock is currently trading at $156 and a market cap of $28 billion, down roughly 8% year to date.
2. Income Statement
The company released its fiscal Q1 2023 results in February, the market reacted negatively to the quarter causing the share price to drop roughly 13% overnight.
Revenue grew 10% to $1.38 billion or 14% on an a adjusted core basis which removes the impacts of foreign exchange and acquisitions and divestures.
GAAP net eps increased 17% to $1.45 per share compared to $1.24 per share in the prior year. Non-GAAP eps which adjusts for acquisition related expense, share compensation and some taxes grew 22% to $2.02 per share from $1.65 last year.
Overall the company had solid growth, so why the drop?
The company also releases its orders, which fell 13% year over year to $1.3 billion. Part of the reason is suspension of its business is Russia as well as Chinese restrictions which accounted for 350 basis points of the drop, but still resulting in a 10% from other causes. The core cause is macroeconomic uncertainty. The company ended the quarter with 2.5 billion in backlog, roughly half a year in revenue.
3. Balance Sheet
The company still has a moderately strong balance sheet the company has cash and equivalents of $2.23 billion, and debt & leases of $2.02 billion, a net cash position of $207 million. As well the company is consistently free cash flow positive, allowing the balance sheet to remain strong while servicing the fixed rate debt.
The company does have a avenues for growth in the long term despite the short term weakness. The company once again raised its expectations going forward during its 2023 investor presentation Keysight has a strong market share within its current segments, with long term growth rates of 4 to 6%, as well the company expects to out perform by 1 to 2 % for a total of 5 to 7% for the company . So, despite the order down turn we will likely see return to growth in the long term once macroeconomic conditions turn more positive.
The company is guiding non-GAAP EPS of $1.91 to $1.97 which would imply growth using the midpoint of 6% for the quarter year over year compared to fiscal 2022s $1.83.
The company has a trailing GAAP PE of 24 times, a non-GAAP pe of 20 times, and a price to trailing free cash flow of 25 times. All together these seem on the slightly expensive side given the short term headwinds, but not abursdely overvalued given the company’s track record since it began trading as its own company in 2014.
Our Take, Keysight is a strong company operationally but is trading near or slightly above fair value at this time, I would like to see how the worsening market conditions specifically in the semi conductor space going forward. But for the long term the company likely has potential but it needs to be at the right price.