You are listening to KeyStone’s Stock Talk Show – Episode 287
Great to chat with you again this week. I am live from the Money Show in beautiful Las Vegas. Brennan will kick off the show with his “Investor Spotlight” on billionaire American investor, hedge fund manager, author, and founder of Bridgewater Associates Ray Dalio. In our YSOT segment, I will tackle a viewer question on SSC Security Services Corp. (SECU:TSX), the largest publicly traded security company which is cash-rich and debt free, paying a solid 4.58% dividend. The listener asks our thoughts on the microcap security consolidator and whether it is a BUY/SELL or HOLD. Aaron answers a viewer question on Constellation Software (CSU:TSX) a massive Canadian tech success story. The company acquires, manages, and grows vertical market software businesses across diverse industries. Impressively, Constellation has acquired over 500 software companies since its inception in 1995. Aaron give you his take on this long-term capital compounder. Finally, in our Star and Dog segment, Brett’s Star is BigBear.ai Holdings (BBAI:NYSE), which offers AI solutions targeted at 3 segments global supply chain & logistics, autonomous systems and cybersecurity. The stock is up 304% over the past year. Brett’s Dog of the week is Foraco International SA (FAR:TSX), a drilling services company operating in 22 countries across 5 continents. In a positive environment for commodities generally, the stock is down 20 plus percent over the past year – Brett let’s you know why.
Let’s get to the show – we welcome my cohost, Mr. Aaron Dunn and the killer B’s, Brett and Brennan.
Poll question:
SSC Security Services Corp. (SECU:TSX),
SSC Security is the largest publicly traded security company in Canada, debt-free, cash rich, and has approximately 3,000 employees from coast to coast. The company provides physical (~85- 90%), electronic security (~5%) cybersecurity (~5%) services to corporate and public sector clients via two wholly owned subsidiaries (SRG and Logixx).
SSC Security was previously known as Input Capital Corp. which was founded in 2011 as an agriculture commodity streaming company providing several flexible and competitive forms of financing which help western Canadian farmers solve working capital, mortgage finance and canola marketing challenges and improve the financial position of their farms. On February 1, 2021, Input acquired SRG Security Resource Group Inc. as a platform for growth in the cyber and physical security business in Canada. On September 14, 2021, Input announced that would change its name from Input Capital Corp. to SSC Security Services Corp. and to consolidate its common shares.
Today, SSC Security’s agriculture commodity streaming business is known as its “Legacy Business” and consists of agriculture real estate assets held for sale including farmland mortgages. The Legacy Business book is shrinking rapidly due to farmer buyouts via refinancing. The company is collecting accounts and making slow but steady progress turning assets to cash working through the legal system. As SSC Security continues to wind down its remaining legacy assets, we expect that those cash flows allocated to legacy assets will be reallocated to the security services portion of the business.I reviewed the business here after interviewing management near the start of 2024 – the stock has basically been flat over the course of the past 52-weeks – then trading at $2.75, today it is $2.62.
Why? Recent Quarterly Numbers – basically down across the board outside of an improvement in gross margins.
The decrease in revenues was primarily due to higher temporary contracts in the prior year. These temporary short-term contracts can fluctuate from one period to another, but management states that long-term recurring monthly revenues remain strong.
Q1 FY 2025 gross profit increased to $5.0 million (17.1% of revenue) from $4.9 million (15.7% of revenue) during the same quarter last year. The year-over-year increase in gross margin is a result of the company’s continued focus on higher operational efficiencies and cost savings initiatives.
Comprehensive net loss for the quarter ended December 31, 2024 was $0.1 million (loss of $0.01 per share), compared to comprehensive net income in the same quarter last year of $0.1 million (income of $0.00 per share).
Growth plans – security business.
- The security business is a highly fragmented industry in Canada. According to Statistics Canada, there are over 2,700 companies providing some kind of physical security services in Canada. Many of these are small owner-operated businesses, with a tier of mid-sized and larger companies as well.
- An opportunity to use SSC’s balance sheet to grow into a solid, well-capitalized, profitable, and growing security platform.
- Strategy is to deploy the company’s balance sheet into growth via acquisition and organic growth opportunities in the physical and cyber security industry, along with adjacent verticals.
- Target: $200 to $300 million annual revenue company over the next 2-4 years. (this is from our interview last year – one year has passed and revenues in the latest period are slightly lower – the company appears to have not made a dent in that target – of course, one meaningful acquisition can change that.
What we like:
Strong net-cash balance sheet:
As at Q1 2025:
Cash and cash equivalents of $11.4 million equal to $0.62 per share;
Working capital of $26.3 million;
No long-term debt.
High insider ownership:
As of December 31, 2024, management, directors and employees owned about 38.0% of the company’s outstanding shares (39.8% on a fully-diluted basis).
Share buy-backs.
Over the past eight fiscal years SECU has bought back and cancelled roughly 47% of the company’s outstanding shares.
Management continues to believe that SECU shares are trading in a price range which does not adequately reflect their value and that the purchase of shares under the NCIB will enhance shareholder value in general.
What we do not like.
Low margins.
Q1 FY 2025 Adjusted EBITDA margin was a scant 4.01%.
Management has stated the business should progress to the 5% EBITDA margin range near term and it has the potential to move slightly higher longer-term.
Lack of organic growth (or any growth in recent quarters – no inorganic growth from acquisitions).
Q1 FY 2025 revenues decreased 5.5% to $29.2 million from $30.9 million during the quarter ended December 31, 2023.
In the absence of acquisitions, growth appears challenged.
Valuations:
SSC currently trades with a trailing 12-month EV/EBITDA of 7.69 and a price-to-sales of 0.41 which are relatively low but the company’s price to adjusted net income is 29.1x on a TTM basis.
Conclusion:
At first glance, SECU is an intriguing albeit low-margin business that holds a strong balance sheet (23% of market cap in cash) and as the company continues to convert its Legacy Business assets into cash the company’s cash balance should help SSC make further potentially accretive acquisitions.
However, the lack of organic growth near-term, and margin profile are significant concerns. – As I stated, the company’s Q3 FY 2025 adjusted EBITDA margin was a scant 4%. Management has stated the business should progress to the 5% EBITDA margin range near term and it has the potential to move slightly higher longer-term which could give the business decent profitability in its sector and help SSC build cash as revenues are projected to be significantly higher over the next 1-3 years. We are not opposed to investing in a quality lower margin business if it checks off a few boxes including no debt, cash-rich, low valuations, and above-average growth. SSC checks off some of these boxes,
but we do not see the company’s trailing 12-month valuations overtly low, and its PE remains elevated.
the current margin profile is too low – combine that will a lack of organic and accquision growth and the stock is not investable in the near term.
If we saw an improved margin profile, cash accumulation, organic growth – an element we see as key in our GARP model – along with better valuations, we might consider SECU. But the lack of execution over the past year is a negative. At present, we MONITOR the business.
Ray Dalio
Slide 1
I recently watched a video on Youtube by Ray Dalio on the rise and fall of empires and is based on his book called “Principles for Dealing with the Changing World Order”. Really, the video is an extended ad for his book. But the book essentially looks at the cycles of nations over the past 5 centuries in an attempt to make sense of the evolution (or cycle) of nations and global economics.
Slide 2
And for my statistics nerds out there… he uses a multi-factor model to explain the relative power of a country in relation to its peak, focusing on 8 variables, including:
- Education
- Technology development
- Competitiveness in global markets
- Economic output
- Share of world trade
- Military Strength
- Power of financial center for capital markets
- Strength of their currency as a reserve currency
Now I am not sure how he is exactly measuring and quantifying each metric… I assume he covers this in his book. But keep that in mind if you watch the video. And using this multi-factor model he plots out the “Power” of the great empires going back to 1500, as shown in a snapshot here from the video.
Slide 3
Being a history buff, I really enjoyed the hour-long video, and it raised me to question… who is this Ray Dalio guy??? And why should I take anything that he has to say about economics and the rise and fall of empires.
So I thought that I would do an Investor Spotlight segment on him to get an idea of who and what kind of investor he is. So, to give a quick rundown on his life:
- Ray was born in 1949 in New York and Graduated with a Finance Degree from Long Island University in 1971.
- Ray’s early life has an interesting parallel to Peter Lynch’s, as just like Peter, Ray caddied at a golf course where he met many Wall Street veterans which eventually got him more interested in investing and helped him get a job at one of their trading firms. So the moral is… if you want to manage a successful investment fund – the fast track is to become a caddie at your local gold course…. Obviously I just kid… but it’s a funny parallel.
- Ray considers himself to be a global macro investor meaning he invests around economic trends such as changes in exchange rates, inflation, and GDP growth – mainly focusing on Currency and Fixed Income Markets.
- In 1975 Ray founded the Hedge Fund – Bridgewater Associates – in his two-bedroom apartment in New York and has served as the co-chief investment officer since 1985. Bridgewater has become one of the largest hedge funds in the world with $124 Billion under management as of April 2024.
- He is also an author of several books, but just to touch on a couple:
- His second ever book was called “Principles” which was published in 2017 and focuses on his investment philosophy
- His most recent book is the one I briefly mentioned before, which is called “The Changing World Order” and was published in 2021 and again focuses on looking at the factors of long-term empire and economic cycles.
Slide 4
Bridgewater Associates has three different hedge funds strategies:
- Pure Alpha Fund – Flagship fund created in 1989. Invests across a diverse set of assets classes including bonds, currencies, stock indexes, and commodities. Closed to outside investment since 2006. And Since 2005 it is reported that the annualized return has been 4.5%.
- All Weather Fund – Launched in 1996 and after 2008 has focused on inflation-linked bonds, T-Bills and Bonds and Gold.
- Pure Alpha Major Markets – Started 2011 – Similar to Pure Alpha fund with advanced liquidity of European Bonds.
Now I looked up Bridgewater Associate’s 13F filing and they own hundereds of companies. And I will just scroll through the 13-F.
Slide 5
And finally to leave you with a Ray Dalio Quote – “Get rid of irrelevant details so that the essential things and the relationships between them stand out. As the saying goes, any damn fool can make it complex. It takes a genius to make it simple.”
And really, this simplicity and focusing on the relevant relationships reminds me of the stat that we have referenced time and time again by Jenga Partners, which indicates that all stocks that gained 10x (or 1,000% plus) globally between 2012 and 2022 had the following commonalities:
- 87% of all global equities that went up 1,000% (10x) or more over the past ten years started as micro or small-caps.
- 82% of those were profitable at the start of their ascent.
- 91% had some history of profitability.
Star of the Week BigBear.ai Holdings (BBAI:NYSE)
1)
BigBear AI Holdings symbol BBAI on the NYSE, the company offers AI solutions targeted at 3 segments global supply chain & logistics, autonomous systems and cybersecurity. BigBear.ai’s customers, which include the US Intelligence Community, Department of Defense, and the US Federal Government, as well as complex manufacturing, warehouse operations, distribution, and healthcare and life sciences, all rely on BigBear.ai’s solutions to empower leaders to decide on the best possible scenario by creating order from complex data, identifying blind spots, and building predictive outcomes.
2)
The Stock has surged 304% over the past year, now trading at $8.61 a share and a $2.2 billion market cap. Notably over the last month trading about 95% higher. So what has caused the stock to surge?
3)
Well, the name should give away at least partially, it is AI which has been the prevalent trend for the last few years now and the investment space has seen heightened interest post-US election. But more specifically the company recently was awarded a contract with the Department of Defence to advance the company’s Virtual Anticipation Network or VANE prototype, the stock surged a whopping 38% on the day of the announcement.
VANE’s AI model’s goal is to better assess news and media originating from countries that are foreign adversaries for national security usage. The solution looks to discover behaviours and relationships hidden in potentially multi-source and dirty data without waiting for subject matter experts and then provide scenario forecasting.
4)
The question is now can the company switch into a profitable company and strong? Right now the company is unprofitable, losing $12 million on revenue of $41.5 million in the reported last quarter. It is in a net debt position of $155 million and has been rapidly diluting shares. Top line growth has generally been chopping the last nearly 4 years, not seeing a surge in consistent revenue growth. And is trading at roughly 12 times sales, not cheap by any means.
So by no means does the company fit KeyStone’s GARP model, but if large government contracts do come in and enable profitability we could see a shift but that has not happened yet. But for now, the Big Bear AI is our Star of the Week.
Dog of the Week Foraco International SA (FAR:TSX)
1) Foraco International symbol FAR on the TSX is a drilling services company operating in 22 countries across 5 continents. The company offers not only mineral drilling but also water drilling services with a 265-rig drill fleet.
2) The stock is down 25% over the past year at $2.00 a share a $199 million market cap, but today the stock fell 11% after the company filed its Q4 earnings.
3) Let’s look into why the market reacted so negatively to the release. For Q4 revenue materially fell by 30% to $60.8 million from $86.6 million, which the company attributes to a poor junior mining financing market – which we can echo from talking to other companies in the space, as well as the company exiting Russia, a negative impact from foreign exchange, and contract timing.
EBITDA fell to $10.4 million from $18.7 million, reducing the EBITDA margin to 17.1% from 21.6%. However, removing one-off items the EBITDA improved to $13.9 million and the margin did improve to 22.9%, as the company lowered SG&A.
The company did have GAAP profitability of 3.4 cents which was an improvement compared to the prior year’s 2.4 cents but the improvement was a shift in non-operating financing costs.
Generally, just weaker financials.
A key non-financial metric, rig utilization really drives home the weaker results, rig utilization rate of only 35%, compared to 55% last year. While there are seasonal shifts amongst other factors the utilization rate has been lower in the past year compared to the prior year.
4) We can look at the geographic revenue breakdown as it shows the general weakness. For Q4 North America was down 10%, Asia Pacific the bright spot did grow 38%, South America down 69%, and EMEA was down 59%. As I said before the company did Exit Russia but has also been impacted by the instability in West Africa, then South America has been the story of a poor Junior market and unusual delays.
5)
Lastly, I’ll highlight that the company does not have an extremely robust balance sheet it does have a net debt position of $61 million, which is an improvement over last year’s $65 million, but when a slowdown does occur like you are seeing here, a robust balance sheet does insulate the company, but we don’t have that at this time. While it is by no means an existential risk at this time it can impair the company’s ability to navigate turbulent markets.
By no means is the company a write-off but it is operationally weaker at this time, and it does get our not-so-coveted award of the Dog of the Week!
