Stock Talk Podcast Episode 264 Show Notes

KeyStone’s Stock Talk Show Episode 264.

Great to chat with you again – with Aaron away on assignment, I will kick off our YSOT segment answering a viewer question on the ever topical, Lightspeed Commerce Inc. (LSPD:TSX), which posted improved Q1 FY 2025 results last week. Despite this, shares are 34% YTD and 89% since their 2021 highs. I will take a quick look at the current quarter, outlook and valuations to see if Lightspeed, a company we have avoided for 5-years, due to its lack of profitability despite excellent revenue growth is finally looking interesting.   In a down market over the past week, Brett reviews a shining star from KeyStone’s Canadian Small-Cap Research, Cipher Pharmaceuticals (CPH:TSX) – the stock was introduced as a buy to clients in late August 2023 at $3.89 and has jumped 229% to close today in the $12.80 range. Cipher is a specialty pharmaceutical company with a portfolio of early to late-stage products. Brett will let you know what has led to the surge in share price over the past 11-months. Finally, Brennan reviews Canadian fertilizer giant Nutrien Ltd. (NTR:TSX), which has seen its share price track lower over the past year after several quarters in which management has lowered guidance. Brennan let’s you know if the bleeding is about to stop or could continue.

Let’s get to the show – my cohost, Mr. Aaron Dunn is on assignment –the killer B’s, Brett, and Brennan will help rescue the show.

Lightspeed Commerce Inc. (LSPD:TSX)

What does Lightspeed do?

Based in Montreal, Canada, Lightspeed is a cloud vendor of omnichannel point-of sale software to retail and hospitality customers. Its software is used by >160k mid-market customers in North America, Europe and Australia. Lightspeed’s applications power single- and multi-location retailers, restaurants, golf course operators and other businesses to compete successfully in an omnichannel market environment by engaging with consumers across online, mobile, social, and physical channels. The company primarily targets small and medium-sized businesses.

Lightspeed is down 89% from its September 2021 highs in the range of $158 – which, at the time, we called ridiculous.

Again, Lightspeed has proven be an excellent growth company in terms of revenue at is light years ahead of most Canadian public companies in terms of its revenue growth trajectory…

We can see it in this table of revenue growth over the past 8 years and and the TTM or trailing-12-months – from 2014 when Lightspeed posted $39.9 million the company has growth its revenues to $1.32 Billion – a tremendously strong growth rate.

But even with all this promise, when the company’s valuations touched nearly $23 billion in 2021, the near-term ineffciencies in market valuations is on full display. Again, a promising company, but this was irrational exurbance, particularly as this table shows, the company’s operating loss has mounted over that period from roughly $35 million to $213 million – but the profitability is improving and we can take a look at the progress in the recently reported Q1 FY 2025 numbers.

Q1 FY 2025 Financial Highlights.

Total revenue of $266.1 million, an increase of 27% year-over-year.

Transaction-based revenue of $174.1 million, an increase of 44% year-over-year.

Subscription revenue of $83.3 million, an increase of 6% year-over-year.

Net loss of ($35.0) million, or ($0.23) per share, as compared to a net loss of ($48.7) million, or ($0.32) per share and an Adjusted Income1 of $16.1 million, or $0.10 per share as compared to an Adjusted Loss of ($2.2) million, or ($0.01) per share.

Adjusted EBITDA of $10.2 million versus Adjusted EBITDA loss of ($7.0) million.

Outlook (Guidance):

• Second Quarter 2025:

Revenue of approximately $270 million to $275 million.

Adjusted EBITDA of approximately $12 million.

A little Q2 colour: For the second quarter, management expects to see similar trends to the first quarter, with sales growth coming predominately from transaction-based revenue as the company continues to expand adoption of its payments and capital offerings. For the second quarter’s year-over-year growth, the company is lapping a significant revenue uplift due to the surge of Unified Payments customers becoming live last year (tougher growth comparables). Furthermore, Lightspeed’s initiatives aimed at growing software sales will only partially impact the upcoming quarter.

• For the full year Fiscal 2025:

Revenue growth of at least 20%.

Adjusted EBITDA of a minimum of $45 million. (most analysts currently expect the company to exceed the $45 million).

Strong Balance Sheet

Cash: $673.9 Million – this is down from $722.1 Million in the preceding quarter.

Debt: $nil

Net Cash: $673.9 Million

Here is the trend – the company is investing from growth, but will a lack of free cash flow, the cash balance has moved 29% lower over the last 2 years. The market expects Lightspeed to be free cash flow positive in FY 2025 – so this may break the trend, which is a positive.  

Valuations:

Summary:

EV/revenue (TTM): 1.4

EV/aEBITDA (FY 2025e): 29x.

PE (TTM): n/a

PE (FY 2025e): n/

Conclusion:

Following a promising Q4 FY 2024, Q1 FY 2025 was a positive – The FY 2025 guidance, states the business can grow at a >20% clip organically while driving better-than-expected margin expansion – we are impressed by the strong organic growth rate, a metric we prescribe a high degree of value to.

On the flipside, while adjusted profitability is moving in the right direction, I stress that it is only adjusted profitability ant , the guidance still implies only at 3.7% margin –  still very low.

We reiterate our opinion that Lightspeed dropped the ball by not focussing efforts on  producing cash flow years ago and its current profitability margins remain rather pathetic and hold back the stock from moving higher near-term in a market that is not assigning premium value to payment processors without solid free cash flow and net income margins. 

Stock trades at over 29 times EV/ FY 2025 EBITDAe which in the near-term remains high.  

The growth and strong balance sheet is intriguing, but we find growth with real profitability elsewhere and continue to monitor Lightspeed near-term.

Over time, we see room for margins to continue expanding meaningfully as Subscription accelerates, Payments penetration rises, Capital expands, and operating costs are controlled – but Lightspeed is not there yet. 

Cipher Pharmaceuticals

1)

Cipher Pharmaceuticals symbol CPH on the TSX is a specialty pharmaceutical company with a portfolio of early to late-stage products. The company acquires products that fulfill unmet medical needs and manages the clinical development and regulatory approval process. The company grows through the expansion of its product portfolio, which is done by investing in drug development programs with favourable risk/ return profiles. The company markets its products directly within Canada and indirectly through partners in Canada, the United States, and Latin America.

2)

The stock is trading at $12.80 a share and a $335 million market cap.

Over the past year, the stock has surged 272% with the most recent jump being due to the deployment of its previously significant cash balance which I’ll get into in a minute.

Cipher has been a KeyStone recommendation since being re-recommended after transitioning to its current form in late August 2023, at the time of the recommendation it was $3.89, representing a gain of 229%.

3)

So, why did we recommend Cipher last year?

• The company had a strong cash position.
• It was both GAAP profitable and cash flow positive
• The valuation was low given the downside risk because of the strong balance sheet, trading at 1.0 times price to book, and just under 5 times FFO.

At the time many investors would likely overlook the company due to the lack of growth, this is due to the portfolio being mature products. That being said the company did have growth prospects even if not visible in the financials, through its pipeline with a treatment for nail fungus as well as a couple of other products in its pipeline, but more importantly, it had the prospect to deploy its cash-rich balance sheet.

Effectively the company at the time of recommendation checked our boxes for a profitable, strong balance sheet, with growth potential at a cheap valuation.

4)

Now let’s look at what has played out over the past year.

The company continued to grow its cash position driven by the internal cash flows, the pipeline products continued to progress.

Then at the end of July, the company announced it had acquired profitable growth dermatology products from ParaPro for $89.5 million US, $40 million from the company’s cash, $40 million from a credit facility, and the remainder in shares. Cipher acquired the Natroba products for the treatment of lice and scabies, as well as the commercial infrastructure of Parapro.

The company expects to submit plans to Health Canada to bring the product to Canada and leverage its existing dermatology infrastructure.

Of course, this has put cipher in net debt likely in the range of $35 million US, which is a weaker balance sheet relative to before, but overall that is still strong given the internal cash flows, the leverage post acquisitions should not be extreme, and still has room for additional albeit likely smaller acquisitions at this time.5)

The company will announce its Q2 earnings later this week, which will give us a picture of the shifted financials. But what we would like to see is a continuance of strong internal cash flows driving a strong balance sheet which allows the company to conduct M&A on top of the pipeline of products which can potentially add organic growth notably MOB-15 a treatment for nail fungus with an expected Canadian market launch in 2026. What we wouldn’t want to see is now that management has seen the share price increase with an acquisition is to jump into non-accretive acquisitions, while I don’t think that will be the case that is something you should always be conscious of for M&A driven growth,

Clients will be getting a full update after the earnings.

“Can we get an update on Nutrien as it continues to go lower”. – Question on Youtube

Your Stock Our Take

Nutrien (NTR:TSX and NTR:NYSE) 

Current Price: $64.62

Market Cap: $32.8 Billion

Dividend Yield: 4.6%

Description:

Nutrien is the world’s largest provider of crop inputs and services, playing a critical role in helping growers increase food production in a sustainable manner. They produce and distribute approximately 27 million tonnes of potash, nitrogen and phosphate products world-wide. They have 6 potash mines in Saskatchewan.

Slide 2

I covered Nutrien back at the beginning of 2022 when the stock traded at $110 per share and with a forward Price-to-Adj. EPS multiple of 4x off of management’s FY2022 guidance provided in May 2022. But throughout 2022, the company lowered its initial guidance in August and then again in November because potash prices were declining as the potash market wasn’t staying as “tight” as management expected. And these decreases in guidance followed into 2023, revising guidance lower in Q1 and Q2.

Slide 3

Looking forward to the full year FY 2024, management is guiding toward:

• Potash sales volume guidance of 13.0-13.8 million tonnes which compares to 13.2M tonnes in 2023 and assumes demand growth in offshore markets and a return to more normal Canpotex port operations in 2024. In North America, we expect increased first quarter sales volumes compared to the prior year due to strong customer engagement to refill depleted inventories.
• Nitrogen sales volume guidance of 10.6-11.2 million tonnes which compartes to 10.4M tonnes in 2023, and assumes higher operating rates at its US and Trinidad plants compared to 2023.
• Phosphate sales volume guidance of 2.6-2.8 million tonnes which compares to 2.6M tonnes in 2023.

HOWEVER, the company revised its guidance practice in 2024 to “focus on providing forward-looking estimates that they believe are of value to shareholders and are less impacted by changes in fertilizer commodity prices.” As such, they only provided “Retail Adjusted EBITDA guidance of $1.65-$1.85B…. but indicate that they are now providing Adjusted EBITDA price sensitivity charts in their investor presentation.

Slide 4

So looking at these charts, if the price of Potash stays around the midpoint of their sensitivity analyisis, we are looking at approximately $5.6B in adjusted EBITDA, whereas they achieved $6.1B in fiscal 2023. So this would place the forward EV/EBITDA at this time around 6.6 times…. Which is essentially more expensive than both times that I covered the stock on the podcast.

Slide 5

Now moving to the most recent financial results, we are recording the podcast on August 6th, but the company reports its Q2 2024 results tomorrow on August 7th, so looking at the Q1 2024 results reported back in May. Keep in mind their results are in USD $$$: 

• Revenues were $5.4 billion, a decrease of 12% over Q1 2023 due to lower net realized selling prices across all segments.
• Adj. EPS was $0.46 per share, down 59% Y/Y and Adj. EBITDA was down 26% Y/Y to 1.1 billion.
• Looking at the balance sheet – as at March 31st, 2024, Nutrien had net debt of $13.1 billion and a fwd net debt to EBITDA multiple of 2.3x.

Slide 6

To conclude on Nutrien, fundamentally I think it is a good business, but it’s a very hard business to predict. As I went over… many potash companies had lofty guidance in 2022 & 2023 with expectations of potash prices to remain high due to what they thought was a tight market. However, management continued to revise guidance lower over several consecutive quarters… And as Ryan said when I covered Verde Agritech – another potash company based in Brazil – he said “what is the point of providing guidance if you are just going to keep moving it around with the volatile price of commodities”… we just can’t rely on it confidently as even management can be wrong on the market dynamics… So I certainly think its interesting that Nutrien has now gone to a more lenient approach by simply placing in price sensitivity charts in their investor presentations and providing production guidance rather than a specific range. And really, this is the real bottom line, if the price of fertilizer goes higher, the stock will likely do well. And the opposite is true if fertilizer prices go down.

• Nutrien has been returning capital to shareholders through its dividend and share buybacks, paying a nice yield of over 4.5% and the trailing payout ratio out of adjusted earnings is 56%.
• The company has long-term targets of growing potash sales to 18M tonnes by 2027 (currently around 13.5M) & Nitrogen division to 13.5M tonnes by 2027 where its currently around 11M right now.
• In April, management initiated a process to divest its retail assets in Argentina, Chile and Uruguay. These regions account for approximately 3% of global retail sales and around 2% of adjusted EBITDA. The decision reflects its focus on core geographies to enhance the quality of its earnings and cash flow. The guidance which I cited previously did not exclude these regions as management has no clarity on when a sale will take place.
• The company is just lapping its tough comparable financial results from when potash prices were elevated.
• The balance sheet remains healthy.

If potash prices remain in the same range going into 2025, as long as production increases, we should again see some growth back in its financials which have been non-existent for the past couple of years.

If you believe potash will do well over the next few years, you could take a position. But for constant cash flow growing businesses which we look for, Nutrien doesn’t meet our criteria.