KeyStone’s Stock Talk Show Episode 277.
Great to chat with you again this week. I will start with our Star of the Week, another company that should be no stranger to clients as it has been a Focus BUY for years in our Canadian Small-Cap research and part of our VIP Portfolio. The company, VersaBank (VBNK:TSX) is up 124% over the past year and 233% since our original BUY. The company is a Canadian schedule 1 Chartered bank and one of the world’s first fully digital financial institution – today, VersaBank primarily makes money from Point of Sales loans and has now moved to the US market. In our YSOT segment, Aaron kicks off the festivities with a quick look at an interesting net-cash, Canadian micro-cap, Canaf Investments (CAF:TSX-V), which processes anthracite coal into de-volatized anthracite – selling calcined to steel and ferromanganese manufacturers as a substitute product for coke. Anthracite, is a cleaner fuel because of its high carbon content and purity vs coke. Brett answers a viewer question on Plurilock Security (PLUR:TSX-V), a cybersecurity services provider, software vendor, and value-added reseller. We have answered questions on the show several times, noting revenue growth without commensurate profitability pushing Plurilock outside our investment criteria. The stock has been extremely volatile YTD and Brett let’s you know why. Last, and definitely least, Brennan answers a viewer question on Jessica Alba co-founded, The Honest Company (HNST:NASDAQ), a personal care company dedicated to creating clean-and sustainably-designed products. Since its IPO in 2021 the stock has been in free-fall with the company unable to generate profitability, Recently the stock is up almost 100% since the beginning of November driven by the company’s strong Q3 2024 results. Brennan gives you an “honest” look at where the stock is today.
Let’s get to the show –my cohost, Mr. Aaron Dunn – and the killer B’s, Brett and Brennan.
Our Poll Question this week?
Do you invest in international stocks (External to Canada/US)
Star of the Week: Again, the stock should be no stranger to KeyStone’s Canadian Small-Cap Growth Stock and VIP clients as it has been a Focus BUY recommendation for several years. Tremendous growth over the past year.
Let’s look at the Star Performance
This is the stock has performed well – driven by strong results in its core Canadian market, but it is the potential of the company’s recent move into the U.S. market that is driving current optimism in the stock.
Let’s give you an expanded version of what VersaBank does?
Today, VersaBank primarily makes money from Point of Sales loans. If you need a loan to buy a motorcycle or a hot tub – you are in luck. The vendor you purchase from may run your credit and offer you a loan on the spot. That loan isn’t coming from Teds Motorcycle shop, it’s coming from a bank like VersaBank. In fact, the majority of VersaBank’s growth these days is from POS loans for HVAC replacements. Something that often costs $10,000 to $20,000. These are nearly car-sized loans!
VersaBank has pioneered the technology to make these kinds of loans easy to offer through merchants.
VersaBank, structures their loans in a way that gives them way less risk than a typical lending bank. Their average provision for credit losses as a % of average loans is an incredibly low 0.01%. That’s to say, there are virtually no credit losses on their loans!
How do they manage that? It’s the way they structure their POS loan agreement. If a loan goes unpaid for 90 days and falls into arrears, the point-of-sale partner repurchases the loan and reimburses VersaBank. This way, VersaBank is not responsible for collections. In other words, merchants are the ones that end up with collections and defaulted loans, not the bank.
Valuations.
Despite the surge in its share price, the valuations remain not overtly stretched – particularly if the company can deliver on its expansion potential in the US market – but this may take time.
Conclusion:
Historically Operated in Canada only – highly successful – increasing revenue by a 134% in the past two years!
The fastest-growing bank Canada on an EPS basis.
Undervalued based on Canadian assets alone.
US Market Entry: recently acquired an American bank which will give them access to offer POS loans to US consumers.
the US market is 10x larger than Canada – and the appetite for credit and point of sale loans is even greater – so the opportunity is potentially greater than 10x.
POS lending is on the rise and becoming extremely popular with both consumers and merchants.
Conclusion:
VersaBank’s POS solution is new to the US market and has the potential to grab the market’s attention.
VersaBank has high operating leverage, meaning profitability increases significantly the more POS business the company does without much need for additional capital.
Near-term the US expansion and weakness in the core Canadian market will likely drap on earnings.
Clients will be updated over the next week.
VersaBank’s 123.81% gain over the past year and 211.49% since KeyStone’s original BUY recommendation make the company our Star of the Week.
Plurilock Security PLUR:TSX 277 YSOT
1)
Plurilock Security Symbol PLUR on the TSX Venture. Plurilock Security Inc. is a multiple-patent-holding cybersecurity services provider, software vendor, and value-added reseller. They operate in highly regulated industries, including Healthcare, Critical Infrastructure, Government & Defence, and Financial Services.
We’ve covered the stock a couple of times before with the last time being in June of 2023, with the takeaway at the time being the revenue growth was positive but to support the growth they were diluting shareholders significantly.
2)
The stock is currently trading at $0.52 down 20% year to date at a $30 million market cap. However, over the summer the stock skyrocketed to about $2.50 a share but quickly came back down.
3)
Looking at the last quarter Q2 2024, revenue came in at $12.6 million, 3.2% growth over the prior year. 80% of the revenue comes from hardware and system sales, 8.5% from software, license and maintenance sales, and 11.5% from professional services. The biggest change is professional services seeing a major uptick by 98% to 1.45 million from 731k.
The change in revenue mix did support a higher gross margin as the company has been focusing on higher-margin activities and a focus on professional services.
The company did do some cost-cutting with layoffs late last year, resulting in lower operating costs of $3.0 million from $3.5 million. However, the company is still at an operating loss of $1.1 million, although an improvement from an operating loss of $2.1 million.
Further down the company had significant losses due to loss on convertible debt and debt settlement, which are one-off items related to the warrants attached to the convertible debt and the issuance of warrants and shares to settle debt. Non-cash but do dilute the company which we will get into in a minute.
The end result is a net loss of $3.9 million, $0.11 per share.
4)
A quick look at the cash flows, the company is still burning cash, having an operating deficit of $1.5 million. Which needs to be covered by raising capital, which Plurilock has done almost continuously through various types of equity raising.
The balance sheet at the end of the quarter, is not great, with slight net debt but effectively even (0.1m). However the company does have a poor current ratio of 0.76 times which can indicate short-term strain, this is driven by the receivables and payables difference.
5)
The stock has previously gone through a 10-1 consolidation but the dilution has continued, at the end of Q1, the company had 10.3 million shares outstanding.
By the end of Q2, largely due to a massive share & warrant placement. By the end of Q2 the company had 43 million shares outstanding, and even since then due to warrant exercising the share count is nearly 59 million outstanding, nearly 6 times the share count since the start of the year. That is extreme dilution. Although the balance sheet should look better once incorporating the cash received from warrant exercising it likely still won’t be great.
6)
A positive point is they have had a couple of significant contracts announced recently.
The company did sign its largest contract ever at $19.3 million US over 3 years with an undisclosed SP500 company, to re-platform its cybersecurity operations stack.
As well, as a larger $5.4 million contract with a law enforcement agency announced last week.
7)
Overall, the company is just not appealing at this time.
The cashflow burn has resulted and will continue to result in shareholder dilution. To be considered the cycle of cash burn and dilution needs to stop. The revenue growth has not been spectacular over the past couple of years. Q3 and Q4 are normally the stronger quarters which will give some insight into if any sort of turnaround is occurring. The cost-cutting and focus on high margins is positive but is still well off being appealing.
YSOT The Honest Company (HNST:NASDAQ)
from Michael via Email – Just wondering what you guys think about the honest company? Sounds like it might be a smart buy now. Also thanks for the recent video. I was highly considering getting in lucid group but not now after seeing your video.
Price: $7.30
Market Cap: $697M
Yield: N/A
Description:
The Honest Company is a personal care company dedicated to creating clean-and sustainably-designed products. Its products include baby clothing, diapers, nursery bedding products, skin-care, and makeup.
The company was co-founded by actress Jessica Alba and IPO’d at $16 per share in 2021 raising over $400 million.
Slide 2
Since its IPO in 2021 the stock has really been in free-fall as the company has been unable to generate any profitability, and only going cash flow positive in 2023…. But recently the stock is up almost 100% since the beginning of November driven by the company’s strong Q3 2024 results.
So lets take a look at the company’s financials here.
Slide 3
First looking longer term, we can see that revenue has had a positive trajectory and has grown since 2019 with a CAGR of 10%, but operating income, net income and cash flow from operations have essentially all been negative, with the exception of 2023 where cash flow was actually positive.
Now looking at the recent quarter of Q3 2024 which drove the stock price higher:
- Revenue increased 15% to $99.2M and was driven by strength in baby products and its wipes portfolios. Tracked channel consumption for the company grew 9.3% outperforming the comparative categories which were down 2.4% in the same period. Consumption for the company’s products at the company’s largest digital customer increased 19%.
- Adjusted EBITDA was positive $7 million compared to a loss of $1 million for the same period last year. This represents the Company’s fourth consecutive quarter of positive adjusted EBITDA.
- Net income was a gain of $165 thousand compared to a loss of $8 million for the same period last year.
So although the company has been losing money, it appears the profitability is trending in the right direction.
Slide 4
And the company actually increased its full year 2024 outlook for both revenue and adj. EBITDA, increasing its revenue outlook to be in the High Single Digit percentage growth, and Adjusted EBITDA now up to a range of $20-$22M.
Looking at the forward valuation using the mid-point of this adjusted EBITDA multiple, the stock trades with an EV/EBITDA multiple of 31 times which is not cheap in my opinion. And on a trailing basis it trades at about 25 times trailing cash flow.
Slide 5
And looking at the balance sheet, it remains quite healthy with cash of $53.4 million, and a net cash position of $38M. But we can see that the company’s share count has been creeping up steadily as the company struggles to generate profitability.
Slide 6
Now just a couple of operational updates…
In 2023 the company executed on a broad-based Transformation Initiative designed to drive growth in higher-margin areas and strengthen the company’s cost structure to increase margin. This includes things like:
- Focusing resources on North America, which includes the exit of its low-margin business in Europe and Asia.
- Exiting low-margin elements of the cleaning and sanitization business in 2023.
- Executing an inventory rationalization program in 2023.
- Re-directing resources to accelerate cost savings, including optimization of our contract manufacturing strategies, reduced shipping and logistic costs, and product costs.
- Realigning resources to reflect the prioritization of higher-margin opportunities.
Slide 7
And we can see that there has been some progress on margins which is positive if the company is going to begin generating more meaningful profitability.
And managent noted in their most recent quarterly conference call “As we look ahead, we believe we have strengthened our foundation for future growth and expect the ongoing execution of our strategy to deliver annual revenue growth, expand profit margins and generate strong cash flow, which also benefits from our asset light business model.”
Slide 8
Conclusion:
- The Honest Company is in highly competitive markets with over 60% of its revenue coming from diapers & wipes. But these are Consumer Staples which are more defensive.
- The company has a good track record of producing high single digit revenue growth and is now moving more focus on increasing margins – which appears to be paying off.
- The company has a good track record of producing high single digit revenue growth and is now moving more focus on increasing margins – which appears to be paying off.
- The stock may be a bit pricey at 30x fwd. EBITDA and 25x TTM CFO, but I see some speculative upside if management can continue to increase margins.
- Overall though it’s not a bad business but a little early for us as we would like to see continued ability to massage margins higher to generate more meaningful profitability.
