KeyStone’s Stock Talk Show, Episode 233.
We have a busy show for you this week – as we prepare for final DIY Investing Webinar of 2023 this Thursday – do not miss out on the event. We have 4 YSOT’s this week. Aaron begins by answering a question on Restaurant Brands International Inc. (QSR:TSX) which reported Q3 numbers that missed estimated on slower Burger King growth – clearly Brennan needs to get out there and consume several Whoppers. Aaron will let you know if QSR is an opportunity or a stock to be wary about on lower growth. I will be answering a listener question on Canadian-legal software company Dye & Durham Limited (DND:TSX), a company we have taken a pass on at $50, $40, $30, and $20. With the stock cut in half once again to $10, a listener asks if DND is now a buy. Additionally, in our YSOT segment Brett answers a viewer question on Transcontinental Ltd. (TCL.A:TSX) a leader in flexible packaging in the United States, Canada and Latin America as well as Canada’s largest printer for items like books, magazines, and newspapers amongst others. Brett takes a look at the company which pays a strong 8.2% dividend but has limited growth at present. Last and certainly least, Brennan answers a viewer question on leading uranium producer Cameco Corporation (CCO:TSX). Brennan let’s you know whether the strong year-to-date run in the stock can continue.
Let’s get to the show – we welcome my cohost, Mr. Aaron Dunn and the killer B’s, Brett, with Brennan.
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Dye & Durham Limited (DND:TSX)
Price: $10.00
Market Cap: $542.3 Million
Company Description: Dye & Durham is a leading provider of practice management software, data solutions and payments technology to law firms and businesses. The company has >60k clients in Canada and international markets and is based in Toronto, Canada.
First Quarter Fiscal 2024 Highlights
- Revenue of $120.1 million, unchanged from the same period in the prior year. The comparative period revenue included an additional $9.3 million of revenue from TM Group, which was divested on August 3, 2023. Excluding the impact of TMG divesture, revenue has grown by 8.1%.
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- Net income of $(13.5) million, a decrease of $2.0 million from the same period in the prior year, primarily due to higher financing costs partially offset by total adjusted operating expenses3 as well as lower stock-based compensation and acquisition and restructuring costs.
- Adjusted EBITDA3 of $68.7 million, an increase of $4.3 million, or 7%, from the same period in the prior year.
Liquidity Numbers (trailing): These numbers are likely to improve as EBITDA and free cash flow are projected to improve, but we need to consider where the company is right now without projections as most analyst projections on this company (it has been a BUY at many of brokerage houses in Canada).
| Net Debt / EBITDA | 7.79 |
Not good.
Debt to Equity in the range of 3.
Free cash flow to debt is around 0.10 – putting this in context and it depends on the industry, a healthy ratio would generally fall between 1.0 and 2.0. 2 plus is very strong. So point 1 (0.10) is not great.
Working capital deficit: Current Assets: at $127 million are less than current liabilities at $150 million.
The company also in its wisdom, with these significant debt levels and a priority to pay back debt recently instituted a dividend – the yield is under 1% and just seems disjointed from the reality of the business.
Valuation:
Trailing EV/EBITDA is 11.2 – I have seen estimates for significant EBITDA growth this year putting the company’s forward-looking EV/EBITDA in the range of 7.5. Which looks more attractive.
Our Take:
Dye & Durham is business grew revenue YOY at 7% and growth in the last quarter was flat, so growth has been decelerating. The growth has basically all come from acquisitions as well which has been the playbook for this company. The playbook, capital structure and overall decision making by management is something to question in this business.
Not to mention a massive (for the size of the business) failed acquisition that would have crippled an already stretch balance sheet.
It is not wonder the stock has been crushed in the market.
DND unveiled a business improvement plan to drive FCF growth and signaled that deleveraging is the key capital allocation priority. The company announced a business improvement plan aiming to drive an incremental $70 MM in annualized free cash flow when compared to Q1/F24 levels. Key drivers of the added free cash flow will include lower capital expenditures ($20 MM savings), M&A and restructuring costs ($10-15 MM savings), ongoing pricing increases (~10% targeted per year) and a modest reduction in operating expenses. All these initiatives sound good, but one must question a company that had to stretch its balance sheet so far in debt, get hammered in the market and finally decide to start to focus on cash flow generation and to reign in spending.
So the stock trades at 7 times EV/EBITDA – there is limited growth from the core business last quarter – where is the growth coming from – management has stated the company’s priority is to pay down debt – the team has painted itself into a corner. High debt, low core growth, higher interest payments. It will be tough to grow via acquisition and it is a long road to pay down debt. The company appears like dead money. Perhaps the DND will be bought out at some point, but I would not want to take on that debt and we would not invest in a business on that possibility alone.
We have been asked about DND many times in the past and continue to pass on the business as we had at $50, $40, $30, $20 and now $10. The valuations may look better but the company will be challenged to grow top line and we see better software related companies with cash rich balance sheets in Canada at present that can go on offense in a downturn, not play defense as DND is today.
YSOT Transcontinental Ltd. TCL.A:TSX
1)Transcontinental symbol TCL.A on the TSX is a leader in flexible packaging in the United States, Canada and Latin America as well as Canada’s largest printer for items like books, magazines, and newspapers amongst others. Revenue is roughly half packaging and half printing.
2) The stock is currently trading at $11 a share with a market cap of $950 million, the shares are down 28% year to date. The shares currently have a dividend yield of 8.2%
3) So looking at the last quarter, revenues came in at $707 million down 5.5% year over year. Adjusted operating earnings before depreciation and amortization came in at $108 million, down 4.5%. Similarly adjusted net earnings per share fell 10.5% to $0.51 per share. So, a top-to-bottom decrease. Management attributes the drop to customer destocking for packaging and a weaker economic backdrop lowering volumes for both packaging and printing. With cost-saving measures in the printing division partially offsetting the decrease.
4) Stepping back looking at a 10-year graph of revenue, growth has not been the company’s strong suit. The company has had relatively flat earnings barring the jump in 2018 is attributed to its acquisition of Coveris Americas which added flexible packaging to the company, but has failed to grow since, and with a drop during the pandemic. Now we are seeing year-over-year declines. The printing industry is obviously a mature industry in decline overall so it’s not surprising to see no organic growth or recently a decline.
5) Now shifting to the balance sheet. The company has a net debt & lease position of $1.1 billion, with trailing adjusted EBITDA of $442 million, resulting in leverage of 2.5 times. Of the company’s $1 billion in long-term debt, $464 million is at a variable rate or $310 million after accounting for swaps. The variable rates have put downward pressure on the company’s bottom line as interest rates have risen.
6)That being said, Transcontinental has continued to have positive operating cash flows. Over the past 9 months, the company generated $226 million in cash from operations, however, once you consider CapEx and M&A as it shifts into more packaging, payment of interest on debt and then payment of cash there is no additional cash left over, meaning there is no additional cash for actual revenue growth only replacement revenue of its traditional business. As well, the dividend has not grown since 2020, at the current $0.23 a quarter.
7) Moving to valuation, the company, the company has trailing adjusted earnings per share of $1.99, resulting in a trailing P/E of roughly 5.6 times. Looking forward given the weakness Q4 which is normally a stronger quarter, earnings for 2023 will be lower increasing the valuation looking ahead.
8) Our Take, the company is unlikely to have any sustained growth given the industry, as well for the near term the weakened macroeconomic environment is putting additional pressure on the company’s operations. Transcontinental is impacted due to higher interest rates in two ways, the increase in interest expense for its variable debt as well as if interest rates stay high until it needs to refinance its next fixed debt, second the company’s shares see downward pressure as investors have moved from these mature higher yield companies into fixed income. Overall, the company is likely near its fair value given the lack of growth in the current macro backdrop.
Cameco (CCO:TSX)
Rex – via email – The stock has done quite well over the last year, up 74%, and is up 280% over the past 5 years.
Slide 1
Price: $56.26
Market Cap: $24.2 Billion
Dividend Yield: 0.2% (Annual frequency)
Description:
Cameco is a Pure-Play Uranium producer headquartered in my hometown of Saskatoon Saskatchewan. The company has two segments which include:
- Uranium (85% of Sales MRQ)– exploration, mining, milling and sale of Uranium.
- Fuel Services (15% of Sales MRQ) – involves the refining, conversion & fabrication of uranium concentrate and sale of conversion services.
Slide 2
Cameco has mines in Northern Saskatchewan and the United States, as well as a 40% interest in the Inkai JV with Kazatomprom (majority owned by the Kazakh Government). Now, other than the JV in Kazakhstan only two of Cameco’s mines are operating which are Cigar Lake and McArthur River.
Operations at McArthur River/Key Lake, had been suspended in 2018 due to deteriorating market conditions but resumed in November of 2022. The Rabbit Lake operation in Saskatchewan was placed on care and maintenance in 2016 (which it remains on). Cameco’s operations in the United States include, Crow Butte and Smith Ranch-Highland, but all are currently not producing as the decision was also made in 2016 to curtail production.
As I said its second segment is Fuel services which supplies much of the world’s reactor fleet with the fuel to generate electricity. These facilities are within Ontario.
Slide 3
Over the long term, revenue and earnings have been on a declining trend due to the persistent decline in the price of Uranium… which led the company to place several of its mines on care & maintenance in 2016/2018 to curtail supply and help the weak market conditions recover.
Since then, the price of Uranium has been on a recovery and as such so has Cameco’s stock price.
Looking at the last quarter (Q3 2023) reported in October:
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- Revenue was up 48% Y/Y to $575M –
- Net income was up to $148M compared to a loss last year
- EPS was $0.34 cents compared to a loss of ($0.05) for Q3 2022.
Balance sheet is healthy:
- Cash: $2.667B
- Debt: $997.6M
- Net Cash: $1.67B
Right now the business trades with a trailing P/E of 90x and P/CFO of about 45x but of course these are elevated due to the recent run in Cameco’s stock price… and given the increase in the price of Uranium which higher prices will be realized over the next few quarters compared to the trailing results, sooo the forward multiple should be more reasonable…. but we just do not know how much more reasonable. If for example they were able to replicate Q3 2023 over the next 3 quarters the P/E multiple would be closer to 40x.
Slide 4
At the end of the day though… the price of Cameco will go where the price of Uranium goes, as shown by my overlay chart here with Cameco’s stock in the blue and Uranium Futures prices in the Orange line. So as you can see, if Uranium does well, Cameco’s stock will do well and vice versa.
Slide 5
Management said on the Durability of Demand & Supply – Climate Change targets need Nuclear to achieve net zero. Policy Makers are embracing Nuclear (which we haven’t seen before). Asia’s nuclear expansion is beginning to move beyond the region into Europe & America. Energy security is also driving growth (geopolitical tensions).
The CEO made the comment that “Demand for nuclear power…is driving the best fundamentals we have ever seen for the nuclear fuel market.”
Acquisition of Westinghouse Electric for $7.9B with Brookfield Renewable where Cameco will own 49% and Brookfield will own 51%. The acquisition was announced a year ago in Oct 2022, and it just received approval from regulators last week and is expected to Close this week.
- Cameco will finance its share of the acquisition with $600M Term Loan and available cash. SOOOOO ONCE THIS CLOSES CAMECO’S BALANCE SHEET SHOULD CHANGE SIGNIFICANTLY. But it is an interesting acquisition as it provides more nuclear capabilities to the company including energy system and reactor technologies, engineering, manufacturing and more.
To Conclude:
Personally, I like the long-term trend of Uranium and its importance to combat climate change and ensure countries with energy security. But over the next decade, I have no idea if this will translate into positive stock performance. Now it appears that there are some tailwinds for the sector…. But at the end of the day… the stock is tied to the price of Uranium and its balance sheet is about to change drastically following the closing of the Westinghouse Electric acquisition. And we cannot forget that from 2004-2020, Cameco wasn’t a great investment driven by weak market conditions…. So at the end of the day… if someone thinks the price of Uranium will continue to perform well over the long term, you could consider Cameco.
