KeyStone’s Stock Talk Show, Episode 238.
It’s great to be back with you again this week with a diverse show just ahead of our annual 2024 “predictions show” where were reveal how well our 2023 predictions panned out and our bold new predictions for 2024. We also are set to launch our 2024 Cash Rich, Profitable Canadian Small-Cap Report next week – clients look for that 125 plus page report in your inboxes early next week. We start this week answering a viewer question on Parex Resources Inc. (PXT:TSX) an oil-weighted producer focused on conventional, high productivity reservoirs in Colombia where it is the largest independent oil and gas company. The stock pays a 6% dividend and the viewer asks us our take on Parex as a way to gain exposure to oil. Aaron Dunn answers a viewer question on Helium – and finds out it is not just for balloons. The segment has garnered a high degree of attention in 2023 and Aaron gives you a 101 on Helium, its uses and let’s you know if there is any value in the public companies in this space. In the wake of Charlie Munger’s recent passing on November 28th, at 99 years old Brenan provides us with a restrospective on the life and times of the legendary investor. Finally, in hounour of the release of our Cash Rich Canadian Small-Cap Report next week, Brett answers a viewer question on Namsys (CTZ:TSX-V) which provides cash management solutions through a fully integrated cash management SaaS which provides smart safe monitoring, cash-in-transit logistics, deposit tracking, online change orders, and cash vault management. Brett will let you know if this profitable micro-cap offers value.
Let’s get to the show – we welcome my cohost, Mr. Aaron Dunn and the killer B’s, Brett and Brennan.
Cash Rich Report Releasing next week! The research which takes 3-4 months has already produced 2 recommendations, both cash rich, cash producing Canadian small-caps that are largely unknown. The first, which was released in late August has gained 66%. Since being recommended, the company reported record Q3 numbers and conducted a successful Substantial Course issuer bid, buying back and retiring a significant amount of shares. The second was released just over a month ago after record quarterly numbers it has already jumped 30%. We like them both long-term – as they posses solid current valuations including excellent balance sheets for companies of their size and good long-term growth prospects and were recently trading at very reasonable valuations.
Parex Resources Inc. (PXT:TSX)
Parex Resources is an oil-weighted producer focused on conventional, high productivity reservoirs in Colombia where it is the largest independent oil and gas company. With cash on the balance sheet, material free cash flow and active NCIB, Parex has been well managed and is a solid international E&P company which despite possessing significant geopolitical risk, has outperformed the vast majority of Canadian E&P’s long-term.
Q3 Fiscal 2023.
Revenues, EBITDA and EPS where down which is to be expected given the lower energy prices year over year.
Q3 Fiscal 2023 Highlights
Record quarterly average oil & natural gas production was 54,573 boe/d, an increase of 7% from Q3 2022, and a 1% increase from the prior quarter.
Generated quarterly FFO of $158 million, a 24% decrease from Q3 2022, and FFO per share of $1.49, a 19% decrease from Q3 2022, which was primarily driven by lower crude oil pricing and increased tax, offset by higher production.
Working capital deficit was $58 million, increased by $55 million from Q2 2023, primarily as a result of the timing of certain capital expenditures. Management expects working capital in Q4 2023 to be positive and build throughout 2024, with forecast production growth, declining capital expenditures and inventory deployment, subject to commodity prices remaining in line with Q3 2023.
2023 Corporate Guidance
Parex’s 2023 average production guidance of 54,000 to 57,000 boe/d and capital expenditure guidance of $450 to $475 million remain unchanged. Building on strong current production, Parex expects its Q4 2023 average production to exceed 60,000 boe/d. The company expects to release its 2024 formal guidance in January 2024, alongside an updated three-year outlook.
Building on strong current production, the company is positioned to bring online three key wells over the remainder of Q4 2023
The forward-looking valuation is at under 1.8x 2024e EV/EBITDA.
Tough First Half 2023:
Capachos Block was shut down from January 21 to April 17, cutting off 6,500 boe/d.
Parex’s first site in the company’s Big swing portfolio, which targets opportunities with the potential to produce 20,000 boe/d, was unsuccessful – led to financial loss of over $55 million in Q2 due to asset impairment.
Largely from cash and cash flow, the company continues to invest heavily for growth dolling out US$156.7 million in Q3 as Parex drilled 16 gross (10.95 net) wells in the quarter. Likely to recede.
Energy prices key: Oil prices have declined from their 2022 peaks, but are currently off their lows of 2023.
Once again, Parex continues to hold a well above average level of geopolitical risk, but the valuation discount at under 1.7x 2024e EV/EBITDA appears to more than compensate investors that want oil & gas exposure.
With Charlie Munger’s recent passing on November 28th, 2023, at 99 years old, I thought that I would include him as our Investor Spotlight on the podcast considering his fabulous investing career and his overall life philosophy.
So to give a quick rundown on his life:
- Charlie was Born in 1924 in Omaha Nebraska
- As a teenager, he worked at Buffett & Son, a grocery store owned by Warren Buffett’s grandfather, Ernest P. Buffett.
- He enrolled in the University of Michigan, but at 19 (1943) dropped out and joined the military but eventually returned to Harvard Law School.
- And he didn’t end up meeting Warren until 1959 at a dinner party in Omaha.
- Managed own Investment Firm – (1962-1975)
- Over that period according to one of Warren’s books, Charlie earned an average Annual Return of 19.8% vs DJIA of 5.0%.
- Joined Berkshire in (1978) as Vice Chairman
- CEO of Wesco Financial from (1984-2011)
- Which started as a savings/loan institution but eventually held a concentrated equity portfolio & was eventually acquired by Berkshire Hathaway.
I wrote an article a few years back on Warren Buffet and Charlie Munger’s investing styles after I watched the 2017 HBO special called “Becoming Warren Buffett”.
And what I came to understand is that both Charlie and Warren’s value investing principles were relatively the same, however, Warren praised Charlie for taking him beyond the limited scope of Benjamin Grahams value investing philosophy.
Where Warren said “Charlie shoved me in the direction of not just buying bargains, as Ben Graham had taught me. This was the real impact he had on me. It took a powerful force to move me on from Graham’s limiting views. It was the power of Charlie’s mind. He expanded my horizons.”
And to fully grasp what Warren means here, we can look at both of their strategies:
Warren’s strategy – came to rely on uncovering stocks that were trading at deep discounts to the market. Frequently gravitating toward small-cap or thinly traded stocks where opportunities were potentially being overlooked because these thinly traded stocks were not followed by analysts.
Charlie’s Strategy – focused on good stocks that were trading near or at fair value. These businesses may not be extremely cheap, but the technology or economic moat that the company maintains is far superior to others and could provide investors solid returns over the long term.
This economic moat investment strategy of buying great businesses at fair values rather than discounted prices was what Warren came to learn early in his relationship with Charlie. So the bottom line is that both Charlie and Warren’s valuation principles were the same, never purchasing over-valued stocks in relation to their cashflows. But ultimately, the stocks that they gravitated to at the beginning of their careers had a very different profile.
Lastly, just going through a few key points on Charlies Philosophy:
Bitcoin & Crypto Currency – “Crypto is an investment in nothing, I regard it as almost insane to buy this stuff or to trade it, it’s just ridiculous that anybody would buy this stuff as there is no compelling reason to own it. Stocks which represent pieces of real businesses and claims to their profits are far superior investments”
When he was asked about EBITDA at one of Berkshire’s annual meetings he said:
EBITDA – “I think you would understand any presentation using the word EBITDA if every time you saw that word, you just substituted the phrase ‘bull***t earnings. Not thinking about depreciation as an expense strikes us as absolutely crazy.”
Lollapalooza Effect – He coined the term during a 1995 Harvard Speech – Humans have many inherent biases and tendencies that can sway our behavior one way or another. When several of them act in concert to drive us toward a particular action, you have a Lollapalooza effect. The Lollapalooza effect can create large-scale drivers of human behavior — and often error. (2008 Selling Sub-Prime Mortgages)
This next one is my all-time favourite as I like to think of myself as a student of stoicism and is probably why I have come to love Charlie Munger and Warren Buffett minds so much.
Underlying Stoicism – “The first rule of a happy life is low expectations. If you have unrealistic expectations, you’re going to be miserable your whole life. You want to have reasonable expectations and take life’s results good and bad as they happen with a certain amount of stoicism.”
This quote is so similar to wisdom from ancient philosophers. Buddha said “Happiness does not depend on what you have or who you are, it solely relies on what you think”, Socrates said “Contentment is Natural wealth, Luxury is artificial poverty”. Plato said “The greatest wealth is to live content with little”….. So the similarity here to these ancient quotes is that Charlie is essentially saying you must control your own mind’s expectations & judgements to live a happy life. And a happy life is what I believe Charlie lived.
YSOT Namsys CTZ:TSXV
Namsys symbol CTZ on the TSX venture provides cash management solutions through a fully integrated cash management SaaS which provides smart safe monitoring, cash-in-transit logistics, deposit tracking, online change orders, and cash vault management. The company sells its products under the branding “Cirreon” and “Currency Controller”.
The stock is up 30% year-to-date at $0.90 a share and a market cap of $24.5 million.
Looking at the last quarter fiscal Q3 2023, revenue increased 11.2% to $1.5 million from $1.4 million. Notably, as the company’s products are SaaS recurring revenue is 98% of the total revenue, with the remainder being legacy business. Management did note that revenue growth was weaker than expected as the rollout of some projects was slower than anticipated.
As well, even though Namsys is Canadian-listed and operated over 95% of sales are based in US dollars as both US sales and international sales are conducted in US dollars. This means that the company benefits when the Canadian dollar weakens against the US dollar.
Gross margin was 59.9%, down from 62.1%.
Net Income remained effectively flat at $360 thousand or $0.01 per share, as higher revenue was offset by lower gross margin, higher SG&A the biggest expense being share compensation as well as being negatively impacted by foreign exchange.
For the last 9 months, Namsys’s net income has grown 18.5% to $1.15 million from $0.97 million, as the company did not have heightened expenses throughout the entire 9 months so the higher revenue did flow through to the bottom line.
The balance sheet is very strong holding $6.9 million in cash and short-term investments, roughly 28% of the market capitalization. Unlike many other small-cap companies Namsys has actually benefitted from rising interest rates as it has held $5.9 million in short-term investments, for Q3 this generated $62 thousand in income, which is effectively free income if the company is unable to deploy the cash elsewhere.
So overall a good financial position with some revenue growth but that growth didn’t hit the bottom line.
So where can growth for a company in a mature industry come from?
For Namsys the answer is international growth, the company is looking at growing market share in both Europe and Africa securing data centres in Stockholm and Cape Town earlier this year. An opportunity presented itself to the company earlier this year as European competitor CPS declared bankruptcy, however, any growth as a result is yet to be seen. This is the common method for individual companies to expand in mature or declining industries, waiting for either the exit of another company or competing for market share. Past CPS Namsys’s other competition in the European market is Giesecke + Devrient.
A quick look at valuations,
The company has become more expansive over the past year as the share price has increased.
The price to earnings is 17.7 times, and the EV to earnings is 12.7 times, EV in this cash is just removing the cash as the company holds no debt. Using FFO or funds from operations the company trades at a price to FFO of 17.5 times as the company’s cash flows have closely aligned with GAAP earnings.
The company is valued high if the company is unable to deploy its cash in an accretive way specifically through M&A. As the additional income from interest of roughly 5% is nice it is still well below what is required when investing in equity. The growth for the company is good on a year-to-date business but the last quarter was weaker. What would push the dial in the benefit of Namsys is seeing revenues come from Europe Africa or other regions it is not currently present in.
We will continue to monitor Namsys.