KeyStone’s Stock Talk Show, Episode 217.

We have a great show for you this week. I will finish of a recent YSOT question on Algoma Steel Group Inc. (ASTL:TSX), one of Canada’s leading steel producers, which just announced its FY 2023 results alongside cost overruns for a transformational electric arc furnace project. Aaron will answer a viewer question on energy transportation and midstream service provider, Pembina Pipeline Corporation (PPL:TSX) following the company’s first quarter results and look into its current valuations and growth prospects. Brett will answer a follow-up question an a company he looked at on the show this past December, Plurilock Security Inc. (PLUR:TSX-V), an identity-centric cybersecurity company that has shown strong revenue growth, but profitability has eluded the business. Last but not least, Brennan answers a listener question on cruise ship giant Carnival Corporation (CCL:NYSE), which after being devastated in the pandemic, has had a strong run year-to-date, but was hit today after it released its Q2 numbers. Brennan will let you know why and whether it offers value today.

Let’s get to the show – my co-hosts Aaron Dunn and the killer B’s, Brett and Brennan.

Algoma Steel Group Inc. (ASTL:TSX) 

Price: $9.61

Market Cap: $ 995.28 Million

Company Description: Based in Sault Ste. Marie, Algoma is one of Canada’s leading steel producers. The company has a production capacity of approximately 2.8 million tons with products that include hot-rolled coil, cold-rolled coil, and plate steel.

Event: This past Wednesday, Algoma reported its Q4 & FY 2023 results that came in slightly above

Street estimates, but well below FY 2022 numbers across the board. The company released Q1 FY 2024 guidance that was well below the previous year.  Additionally, Algoma provided updated budgetary estimates for its electric arc furnaces (EAF) project that included significant cost and timeline overruns. The announcement was a surprise as in Late January of this year Algoma reported the project was both on time and on budget.

A quick look at the numbers.

Q4 FY 2023:

  • Consolidated revenue of dropped 28% to $677.4 million from $941.8 million.
  • Net loss of $20.4 million, compared to net income of $242.9 million in the prior-year quarter.
  • Adjusted EBITDA of $47.9 million and Adjusted EBITDA margin of 7.1%, compared to $334.4 million and 35.5% in the prior-year quarter.
  • Cash flows from operations dropped 78.5%.
  • Shipments of 571,647 tons, compared to 547,217 tons in the prior-year quarter.

The weaker numbers were driven by lower steel prices – revenue per ton of steel sold was US$1,185, compared to US$1,721 in Q4 FY 2022.

EAF Project Cost Overruns:
Algoma’s project will feature a pair of electric arc furnaces that will replace the plant’s existing blast furnace, coke oven batteries, and basic oxygen steelmaking operations. They will be far more efficient and should lead to better cashflow long-term.

Management surprisingly increased the budget for its EAF project by $125- $175 million ($825-$875 million of total project costs – from $703 million estimated in January), representing a 59-83% increase over the remaining capital yet to be contracted last quarter. It appears that detailed engineering work for the project was completed 6 weeks ago and Algoma received bids that carried higher-than-anticipated costs. Additionally, supply chain disruptions, particularly related to micro-processing chips, are expected to delay EAF commissioning until the end of calendar 2024, compared to the initial timeline of around mid year calendar 2024.

Current Valuations:

On a trailing basis, Algoma looks attractive with a PE of 5.4 and an EV/EBITDA of 1.9.

However, estimates for FY 2025 earnings and EBITDA are significantly lower.

Balance Sheet:

Cash: $247.4 million.

Debt: $122.7 million.

Net Cash: $124.7 million.

Our Take:

The electric arc furnace project appears to be a smart one, but the cost overruns and launch delays are unfortunate near to mid-term. While management stated that internal cash generation and an anticipated working capital release of $100-$150 million, should be more than sufficient to fund ASTL’s capital requirements, even with the overruns, but we do note the company just filed a Base Shelf Prospectus allowing them to raise additional capital – the issuance of shares at depressed prices is a potential threat to keep an eye on over the next year.

Algoma, as with all commodity sensitive businesses, is highly sensitive to the pricing of its underlying commodity, in the case steel for profitability. The balance sheet is currently solid, which is a must for an investment in this business, but it could move to a net debt position funding the EAF project, dependent on the pricing environment. If one believes steel is headed higher over the next 3-3 years as the more efficient operation are brought online Algoma is interesting, but projecting the price of steel or most commodities, is often tantamount to guesswork. As a result, it remains a speculative investment and given the near-term cost overruns and uncertain economic outlook, we are not buying Algoma at present.

YSOT – Carnival Corporation (CCL:NYSE)

Jeff – Carnival cruise reports earnings next week, the stock is still depressed since the pandemic drop, do you think there is an opportunity?

Slide 1

So yes, the stock is down 73% since January of 2020 where it essentially halted operations and cut its dividend, and today it is down 7% right now (on June 26th) following its recent earnings results.

Price: $14.65
Market Cap: $19.8 Billion.

Description: Carnival Corporation operates a fleet of more than 90 ships which visit approximately 700 ports under AIDA Cruises, Carnival Cruise Line, Costa Cruises, Cunard, Holland America Line, Princess Cruises, P&O Cruises (Australia), P&O Cruises (UK), and Seabourn brand names.

Slide 2

Looking at the financials for Q2 2023 which drove the stock lower today. But keep in mind, the comparables that we are going off of from 2022 remain depressed so this growth is one off:
Revenue came in at $4.9B, an increase of over 100%, but was an all-time second quarter record for the company.
Adjusted EBITDA was $681M, a substantial increase from a loss of $(928)M in Q2 2022.
Adj. EPS was a loss of $(0.31) compared to a loss of $(1.64) in Q2 2022.
And while the company is still losing money, customer bookings continue to show positive momentum, reaching an all-time high of $7.2B and surpasses the previous record of $6.0B reached in 2019.
Balance sheet has $30.6B in net debt, with about 80% fixed rate and the rest at floating rates, and it has a forward Net debt to EBITDA multiple of 7.3 times and a TTM times interest earned ratio of 0.7x (which is a concern as it remains under 1)…… (EBITDA/Int. Exp.)
And just looking at the company’s 2023 Guidance, it does look promising as the company is projecting to get back into positive EBITDA for the year, but adjusted earnings remain negative. And if we use the adj. EBITDA guidance, the stock continues to trade at about 12x its high end of EBITDA guidance.
And in the near term – which is maybe why the stock dropped today – CEO Josh Weinstein noted that high labor, fuel costs and marketing costs are still facing the company.

Slide 3
The company introduced its SEA Change Program, with a few strategic objectives going forward to 2026, which include:
More than 20% reduction in carbon intensity compared to 2019.
50% increase in adjusted EBITDA compared to 2023 June guidance, representing the highest level in almost two decades.
Adjusted ROIC of 12%.
These estimates are based on net capacity growth of less than 2.5% compounded annually from 2023.
By the end of 2026, the company is expecting to approach investment grade leverage metrics. (as both Moody’s and S&P had downgraded them to non-investment grade following the pandemic)


Overall, I think that Carnival Corporation is in the right direction, as the financials appear to be on the path to returning to pre-pandemic levels with bookings increasing to record levels, and the company beating its Q2 guidance. But the company still has a lot of work to do as its profitability remains depressed and has a very levered balance sheet which is a concern. And given the elevated debt levels and continued cost pressures, I do not believe that the stock would be worth an investment at this time. At least not until they can pay down a significant portion of their debt and show that they can continue to achieve their profitability targets going forward.

YSOT Plurilock Security Inc. PLUR:TSXV


A question from Garrett, asking: “Plurilock (PLUR.V) seems like it has a good product, but annoying keeps issuing more stocks and diluting the value of the stock.”

We looked at the company late last year and had similar points.

But, let’s look through it again to see what has changed.

Plurilock Security Symbol PLUR on the TSX Venture. Plurilock Security Inc is an identity-centric cybersecurity company that reduces or eliminates the need for passwords by measuring the pace, rhythm, and cadence of a user’s keystrokes to confirm their identity. They operate in highly regulated industries, including Healthcare, Critical Infrastructure, Government & Defence, and Financial Services.

The stock is currently trading at $0.145 a share and a market cap of $10 million, and is up 3.5% year-to-date, effectively flat.


A rundown of Q1 2023,

Revenue was up to $15.8 from $7 million, a massive increase of 127%, but this is largely due to 2 acquisitions over the past year. 79% of revenue came from Hardware & system sales, with 17% from software, license, and maintenance sales, and the remaining 4% from professional services.

Gross margin has been improving, with Q1 coming in at 13.6%, a notable improvement from the previous years, and quarters. The increase is due to a change in revenue mix as more revenue came from the software, license, maintenance sales, and professional service segment, which produces a higher margin than hardware.

However, profitability is still poor.

Plurilock had an operating loss of $1.2 million an improvement from a loss of $2.2 million, a net loss of $1.4 million an improvement from a net loss of $2.4 million. On a non-GAAP basis, adjusted EBITDA was a loss of $1 million compared to a loss of $1.9 million.

Plurilock had cash including restricted cash of $1.4 million and a net debt position of 1.9 million.


Dilution is still occurring regularly,

At the end of Q1 2022, the company had 70.3 million shares outstanding, now at the end of Q1 2023 the company has 87.3 million shares outstanding a 24.3% increase year-over-year. Some of the share dilution was related to acquisitions, but even without that consideration share count would have increased by 19%.

Further, the company has 13.5 million of stock options outstanding and 13 million in warrants outstanding at the end of the quarter.

And, that’s not the end of dilution, in June the company placed 5.3 million units which is one share and a warrant in one transaction, and in another ongoing transaction looking to place 4.9 million units. Both of these transactions sold at $0.145 per unit, the same price as the shares on the public market.  The warrants are at $0.20, so if you were to see the stock price rise it would result in those warrants being exercised resulting in more dilution.


You may be asking, Why is Plurilock constantly diluting its shares?

Well, they need cash, the last quarter did have a positive operating cash flow of $1.7 million but this was due to working capital changes, specifically an increase in accounts payable which will need to be paid at a point. Before working capital changes Plurilock had a cash deficit of $1.2 million during the quarter.

But, in reality, ignoring the timing of working capital shifts the company is consistently cash flow negative, so they need to raise money through either debt or equity, Plurilock does have an outstanding Line of credit which is partially paid down in the last quarter, but the company’s preferred source of financing at this time is equity, therefor dilution.

As well, it would not surprise me, the reason for the recent financing was to pay down accounts payable which made operating cash flow seemingly positive in the last quarter.


Our Take,

The company is far from any sort of recommendation at this time.

Yes revenue growth is good, but it does not make a company investable, profitability and positive cash flows do. They need to start producing cash flow through operations, so they can stop the spiralling dilution. If both share placements close in the quarter, you’ll see double-digit percentage share count increase during the quarter, raised at effectively the stocks all-time low, it’s just not investable at this point due to that fact. A significant shift needs to occur before the Plurilock can be considered.





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