KeyStone’s Stock Talk Show, Episode 235.
It’s great to be back with you again this week discussing among other things, the Big news in the world of AI with week as the CEO of OpenAI the non-profit company behind Microsoft backed ChatGPT was ousted only to be hired back by Microsoft – sound confusing? Brett will sort you out. Aaron will take you to school with as snippet from our Latest DIY on why Canadian investors require basic U.S. exposure in their portfolios. I will answer a viewer question on Titanium Transportation Group Inc (TTNM:TSX) a North American transportation company with asset-based trucking operations and logistics brokerages servicing Canada and the United States. The company, which pays a 3.42% dividend, reported weaker Q3 earnings and updated is guidance. I will let the viewer know if Titanium is a BUY/SELL or HOLD. Last, and certainly least, a man who is just day’s away from heading to Vegas for a punished stag, Brennan answers a viewer question on Converge Technology Solutions Corp. (CTS:TSX), a software-enabled IT & Cloud Solutions value-added reseller which we have already answered questions on in 3 previous segments, but the appetite for info on this company is seemingly unquenchable. Brennan, let’s you know whether his previous take to avoid the business has changed.
Let’s get to the show – we welcome my cohost, Mr. Aaron Dunn and the killer B’s, Brett, with Brennan.
Now let’s just clarify something – it is not your stag, it is a friends…so ladies…he is still single….
Titanium Transportation Group Inc (TTNM:TSX)
Price: $2.32
Market Cap: $103.92 Million
Dividend: 3.42%
Company Description: An asset-based logistics and trucking company that services over 1,000 customers mainly in Ontario and adjacent regions. The company is a leading industry consolidator, completing 12 acquisitions since its inception. Operations include truckload, cross-border services, Canadian and US freight logistics, and warehousing and distribution services.
Q3 2023 Financial Highlights compared with Q3 2022:
- Revenue dropped ~1% to $112.7 million from $113.4 million in Q3 2022.
- EBITDA was lower at $13.5 million, compared to $15.5 million in Q3 2022
- EBITDA Margin lower at 13.6%, compared to 16% in Q3 2022
- Truck Transportation segment revenue of $62.4 million, compared to $54.9 million in Q3 2022
- Logistics segment revenue of $51.5 million, compared to $59.6 million in Q3 2022
- Fully diluted net income per share of $0.04, adjusted net income per share of $0.05 after normalizing for one-time items, compared to Fully diluted net income per share of $0.14 in Q3 2022. On a normalized basis net income was down (71.3%).
Quarterly highlights:
- Completed strategic U.S. asset-based acquisition of Crane Transport, of Oakwood, Georgia, adding two hundred trucks, two strategically located terminals in Georgia and Alabama, and approximately US$60 million in top line annual revenue, further expanding Titanium’s North American footprint.
- Announced the Company’s seventh U.S. Freight Brokerage office in Jacksonville, FL.
Management Comments: - “During the third quarter of 2023, our industry continued to face significant headwinds including adverse economic conditions, soft demand and over-capacity,” – Ted Daniel, Chief Executive Officer, Titanium Transportation Group.
2023 Guidance:
Consolidated Revenue: $430 to $450 million.
Adjusted EBITDA Margin: 10.5% to 12.5%.
Context – Guidance Lowered: A sluggish freight environment caused the company to lower its annual revenue guidance to $430-450 million from $450-$470 million, but the company is maintaining its EBITDA margin assumption of 10.5-12.5%.
Valuation:
The forward-looking EV/EBITDA of 5.5 and PE of 10 appear attractive, but EPS is expected to be significantly lower in FY 2023 ($0.23 vs. $0.55).
Our Take:
Lower Capex in FY 24 and FY 25 – Following ~2 years of a heavy capex replacement cycle (partially exacerbated by delays brought on by the pandemic), Management noted on the call that they do not anticipate further purchases of trucks over the next few years (average age of fleet now at 1.6 years) and that they have caught up with trailer replacements. Capex of $14 m (million vs. $77.8 million in F22 and an estimated $55 million in FY 2023. Given lower capex spend, Management anticipates strong FCF generation over the next two years.
In our opinion, with net debt to expected 2023 EBITD in the range of 3.5, the company will need that free-cash-flow to begin paying down debt more aggressively – this is a priority.
10-year revenue growth (CAD dollars).
Limited growth organically near-term – fair value, higher risk in a recession.
Converge Technology Solutions (CTS: TSX) Your Stock Our Take
Slide 1
From James via email – “Is Converge Technology , CTS a buy now that it is growing revenue and earnings?”
Current Price: $4.06
Market Cap: $813 Million
Dividend Yield: 0.97% (forward)
Description:
Converge Technology Solutions Corp. is a software-enabled IT & Cloud Solutions value-added reseller (VAR) focused on delivering advanced analytics, application modernization, cloud, cybersecurity, digital infrastructure, and digital workplace offerings to clients across various industries. The company supports these solutions with advisory, implementation, and managed services expertise across all major IT vendors in the marketplace.
We have covered Converge Technology Solutions several times on the podcast now:
The first time was in October 2020:
EV/EBITDA: 3x
Adj. EBITDA Margin: 5%
Net Debt: $207M
Net Debt to EBITDA: 5x
Shares: 122M
The second time was in March 2022:
EV/EBITDA: 22x
Adj. EBITDA Margin: 7%
Net Cash: $229M
Shares: 215M
The 3rd time was May 2023:
EV/EBITDA: 7x
Adj. EBITDA Margin: 6%
Net Debt: $321M
Net Debt to EBITDA: 2.1x
Shares: 210M
And every time my conclusion was essentially along the lines of the business having great growth driven by acquisitions which was funded by both debt and equity dilution… but the stock had very thin margins which made it difficult to justify gaining a substantial EBITDA or price-to-cash flow multiple.
Slide 2
Slide 3
Company Updates:
The last time I discussed the stock management had concluded a strategic Review process to evaluate a full range of alternatives, including a sale, merger, divestiture, recapitalization, other strategic transaction, or continuing to operate as a public company. Which in May they decided to continue as a public company and execute on its business plan.
Recently the BOD authorized the initiation of a quarterly dividend of $0.01 per share.
The company also intends to resume purchases under the NCIB, where looking at this chart you can see that they haven’t issued any new shares since 2021 and have been slowly reducing the count with its NCIB.
It may be worth to mention that the company is also integrating a new ERP system by the end of 2024 in North America and then in 2025 in Europe which they believe will help increase margins…
In the company’s Q1 Conference call, management indicated that they were pausing on acquisition to focus on integration, cross-selling and cash generation. So seeing that the last quarter reported was Q3, and their last acquisition was closed in September of 2022… the Q4 results upcoming will primarily be organic growth.
Slide 4
Recent Financial Results: (Q3, 2023)
Net Revenues were up 38% to $710 million, compared to the same period last year.
Gross Sales organic Growth was 24% Y/Y… but keep in mind this is organic growth of gross billing sales as compared to the actual net sales that Converge bring in.
Adjusted EBITDA increased 33% to $41.3 million, (Adjusted EBITDA margin 5.8%).
GAAP EPS was a loss of $(0.01) in the quarter and Adjusted EPS was flat at $0.10 per share, compared to the same period last year.
The reason for the decline in profitability margins was due to product mix from higher hardware sales during the quarter. And several of the acquisitions completed last year are high-volume low margin businesses.
The company now has net debt of $307.5 million and a trailing net debt to EBITDA multiple of 1.8x. Over the past 9 months they were paying 7.4% interest rate compared to 5.1% last year.
And trades with a trailing EV/EBITDA multiple of 6.7x and a P/CFO of 5.6x.
The company also provided Adj. EBITDA guidance for Q4 2023 of ~$46M… which will equate to ~7% growth year over year, but without any net revenue guidance…. We are in the dark on what the adj. EBITDA margin is anticipated to be. However… something that I find interesting is that management references that it targets a 30% “Adj. EBITDA to Gross Profit margin” over the next few years rather than a typical Adj. EBITDA margin…. and if we look at what the guidance indicates for Q4, they are looking to do 25%….
Slide 5
Now I did this last time in May but lets do it again – just quickly look at how the company is adjusting its “Net Income”
You can see that every quarter the company is adding back significant acquisition, restructuring and other related expenses.. Now personally, I think adding back these “special charges” may be a little suspect, as the company is consistently making acquisitions, and incurring these costs….
Slide 6
Revenue growth has been tremendous – driven by an aggressive cadence of acquisitions but in the near-term management plans to slow down on acquisitions and focus on integration.
Essentially, we have seen the company go from significant net debt, to then issuing shares to improve the balance sheet and get back into a net cash position, but now the company is back into a significant net debt position – now with net debt of $307M and a net debt-to-EBITDA multiple of 1.8x (2.1x in May). I will also note that it is nice to see the company paying down its debt and not continuing to issues shares at this time and are actually buying some back.
The company now pays a dividend yield of under 1%…… which equates to an outflow for the company of about $8M a year… so personally for the ever so slight yield… I think I would rather the company just continue to pay down its debt or utilize it for acquisition so that it does not have to dilute in the future.
The company trades with an EV/EBITDA multiple of under 7x. But Adj. EBITDA margins and net profit margins continue to be very thin and management has voiced that the anticipate to increase them for several years now… and we did see them increase over 2021.. but that growth in margins has stopped at around 6%.
So, to answer your question James on whether it is a BUY right now… It continues to be a company which we simply monitor and not a name we would recommend to our clients.
Sam Altman CEO of openAI Fired
1)
OpenAI the non-profit company behind ChatGPT and DALL-E has had a major change of leadership over the weekend. The CEO and Public Face Sam Altman was removed as the CEO of the company. This came just a couple weeks after OpenAI’s first dev day conference, in which the keynote was run by Altman introducing its new models and products and had Microsoft’s CEO Satya Nadella coming on stage as well.
2)
Moving to the statement released on the 17th, Sam Altman was removed as CEO and the board of directors and Mira Murati was appointed interim CEO.
The blog post announcing the changes states:
“Mr. Altman’s departure follows a deliberative review process by the board, which concluded that he was not consistently candid in his communications with the board, hindering its ability to exercise its responsibilities. The board no longer has confidence in his ability to continue leading OpenAI.”
Greg Brockman Open-AI co-founder stepped down as chairman of the board.
The push to out Altman was led by the chief scientist Ilya Sustskever.
3)
Since the blog post, we’ve seen significant changes. Co-founder Greg Brockman quit shortly after. A letter to the board from over 500 employees of the company’s 770 or so employees asked for the reinstatement of Altman and Brockman, and the installment of two independent directors. Upwards of 650 employees have reportedly signed since the initial release.
Notable signatories include interim CEO, Mira Murati and even Ilya Sustekever the man who led the charge to remove Altman, who has since posted an apology on Twitter for his effort in the removal.
A key excerpt of the letter from the employees:
“Your actions have made it obvious that you are incapable of overseeing OpenAI. We are unable to work for or with people who lack competence, judgement and care for our mission and employees. We, the undersigned, may choose to resign from OpenAI and join the newly announced Microsoft subsidiary run by Sam Altman and Greg Brockman. Microsoft has assured us that there are positions for all OpenAI employees at this new subsidiary should we choose to join. ”
4)
Like the letter said Altman and Brockman were hired by Microsoft over the weekend. OpenAI and Microsoft have had a major partnership since Microsoft’s initial investment in the company in 2019 and has since invested over $13 billion. Clearly, Microsoft disagrees with Altman’s removal effectively offering to take over the human capital of OpenAI.
As well, now that Altman is under Microsoft, the very temporary interim CEO Murati, was replaced by Emmett Shear the former CEO and co-founder of the now Amazon owned live streaming service Twitch. Shear in his 1am post stating his appointmented mentioned that
“The board did *not* remove Sam over any specific disagreement on safety, their reasoning was completely different from that.”, so, still no specific clarification on what the actual disagreement was.
5)
However, perhaps the most important takeaway for investors is Microsoft seems to have come out on top. They now have atleast the leadership of the most influential AI products of the past year, and perhaps a significant amount of the employees as well. Although Microsoft had invested a significant amount of money they have never had direct control due to the structure of the company. Bringing the human capital allows Microsoft to enhance their inhouse research and development. Additionally, in Shear’s post, he stakes that the partnership with Microsoft is still strong, showing that Microsoft will still benefit from its investment in OpenAI, Nadella has echo’d the sentiment.
