Stock Talk Podcast Episode 289 Show Notes

You are listening to KeyStone’s Stock Talk Show – Episode 289

Great to chat with you again this week. In our YSOT segment, I will begin with a viewer question on Kraken Robotics Inc. (PNG:TSX-V), a marine technology company providing best-in-class, ultra-high-resolution, software-centric sonar and sensors, power systems, and underwater robotics systems for military and offshore applications. This past week, the company received a record battery order and clarified details around its new Halifax-based battery manufacturing facility – we take a brief look at the announcements and Kraken’s current valuations. Aaron answers a viewer question on High Liner Foods (HLF:TSX), a leading North American processor and marketer of frozen seafood products, supplying retail and food service markets with a diverse portfolio of value-added seafood offerings. The stock has moved higher after reported better adjusted earnings in its Q3 – Aaron let’s you know why and if it is an opportunity. In third YSOT of the week, Brett tackles a viewer question Hims & Hers Health (HIMS:NYSE), which operates a telehealth platform that connects consumers to licensed professionals. The stock has performed extremely well over the past year, up 187% but recently came under pressure after the removal of GLP-1 drugs from the FDA shortage list. Brett let’s you know if the drop is an opportunity or a sign of things to come. Last and certainly least, Brennan answers a viewer question on Enterprise Group Inc. (E:TSX), which provides specialized equipment and services used in the build out of infrastructure for the energy, pipeline, and infrastructure construction industries. The stock has had a great last 12-months but pulled back recently, and Brennan let’s you know if the drop makes Enterprise more attractive.

Let’s get to the show – we welcome my cohost, Mr. Aaron Dunn and the killer B’s, Brett and Brennan.

Poll question:

YSOT Kraken Robotics Inc. (PNG:TSX-V)

Marine technology company providing best-in-class, ultra-high-resolution, software-centric sonar and
sensors, power systems, and underwater robotics systems for military and offshore applications. The
company is based in St. John’s Newfound land and has operations throughout North America, Western
Europe, and Latin America.

The shares year-to-date are down roughly 21% – more following the risk off trade near-term in the Canadian market.

Having said that – shares are up nearly 100% over the past year – more indicative of the growth in the business over the past several years.

Let’s take a quick look at the company’s most recently released numbers (Q3 FY 2024):

Year-to-date (first 9-months of 2024):

• Revenue year-to-date increased 52% to $63.2 million, compared to $41.6 million in the comparable nine-month period ending September 30, 2023.
• Adjusted EBITDA year-to-date increased 64% to $13.7 million compared to an Adjusted EBITDA of $8.4 million in the comparable nine-month period. Adjusted EBITDA1 margin year-to-date was 22% compared to 20% in the comparable year.
• Net income in the quarter year-to-date increased 117% to $6.4 million, compared to net income of $3.0 million in the comparable nine-month period.

But…the Q3 numbers were softer.

• Revenue for Q3 2024 declined 4% to $19.5 million compared to $20.3 million for the quarter ending September 30, 2023. The year-over-year decline occurred as a significant increase in SeaPower™ subsea batteries and Services revenue did not offset lower KATFISH™ and Remote Mine Disposal System (RMDS) revenue.
• Adjusted EBITDA declined 6% to $4.1 million compared to $4.4 million in the prior year due to slightly lower revenue in the quarter. Adjusted EBITDA1margin in the quarter stood at 21.2% compared to 21.7% in the comparable quarter.
• Net income declined 29% to $1.6 million, compared to net income of $2.3 million in Q3 2023 due to higher financing costs relating to the credit facility entered during April 2024.

This, alongside current market dynamics, has helped push Kraken lower near-term.

Valuations:

2025e Adj PE: 21.4

2026e Adj PE: 12.58

We see the current estimates as optimistic near-term.

Conclusion:

Good company – valuations are fair near-term.

If PNG hits 2026e (aggressive), then it offers some value.

Near-term we monitor for guidance and a better potential entry point.

YSOT Hims $ Hers Health – Viewer Request

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Company Description:

Hims & Her Health symbol HIMS on the NYSE operates a telehealth platform that connects consumers to licensed professionals. The company offers a curated range of prescription and non-prescription products on a subscription basis with a focus on personalized healthcare. The company serves four core specialties: sexual health, dermatology, mental health, and weight loss.

As a whole, since the launch in 2017, the company has staged itself as a disrupter of traditional pharmaceutical companies. The service now serves over 2 million subscribers.

Slide #2

The stock has performed extremely well over the past year, up 187% to $42.17 at a $9.0 billion market cap, despite falling very recently from its all-time high of $73 after the company aired a Super Bowl ad. The stock fell recently due to the removal of GLP-1 drugs from the FDA shortage list. The branded versions of GLP-1 drugs include Ozempic and Wegovy with the active ingredient being semaglutide.

Slide #3

The company has offered compounded semaglutide since May 2024, which accelerated growth for the high-demand but in short supply treatment. But now that has changed, the FDA on February 21st removed semaglutide from the short supply list, which corresponds with the large drop in the stock price, cutting the stock effectively in half before some recovery. Effectively, this means that Hims will no longer be able to offer the GLP-1 copy drugs in the near future, with the company stating that semaglutides not to be offered on the platform after Q1. As the GLP-1 compounded drugs were a major growth driver, the stock reaction is not exactly surprising, but anyone invested in the company should have been expecting the GLP-1 party to end, just not exactly when. Further, the other concern I have is the reduced ability to cross-sell, the cheap GLP-1 offerings brought people onto the platform, which will no longer be the case.

Slide #4

The company is expecting to still offer oral-based weight loss solutions, as well as generic liraglutide later this year. Which is a daily injectable instead of weekly and generally has been less effective than semaglutides. But the trade-off is that the Liraglutide HIMS is offering will be a couple of hundred bucks a month compared to the over $1000 of the branded semaglutides.

Slide #5

Switching to pace to the most recent financials reported on February 24th, so a few days after the shortage removal.

For the year, the highlighted operational metrics, subscriber count grew 45% to 2.2 million, monthly average revenue per subscriber rose 38% to $73, Net orders increased to 22% to 2.8 million from 2.3 million and average order value rose 63% to $168.

High growth across the board, but the average revenue per subscriber will be elevated compared to the future as the semaglutides are more expensive than the company’s other offerings. The other aspect to which is in Hims favour is increased personalization which comes at a premium.

Slide #6

For the year, the company’s revenue grew by 69% to $1.5 billion from $872 million, and when excluding the GLP-1 offerings revenue grew by 43% to $1.2 billion. Gross margin came in at 79% compared to 82% in the prior year, primarily due to the GLP-1 products being priced strategically to attract customers. Adjusted EBITDA grew substantially to $177 million from $50 million, with an improved margin of 12% compared to 6% in the prior year. The company posted its first year of GAAP profitability with all four quarters being GAAP profitable, with $0.53 per diluted share compared to a loss of $0.11 in the prior year. Similarly, free cash flow grew substantially to $198 million from $47 million.

Overall a very strong year.

Slide #7

The balance sheet is strong, with cash and short term investments of $300 million, and only minor lease liabilities and no other debt.

Slide #8

Shifting to guidance for 2025, the company expects revenue of $2.3 to $2.4 billion, implying a 56-63% growth, with adjusted EBITDA of $270 to $320 million, a 12 to 13% margin.  The guidance does not include any commercial offerings of semaglutide, so whatever amount of semaglutide the company can sell within the year is not included, meaning there is potential upside compared to the guidance.

Slide #9

So far I’ve been positive on the company, but let’s look at the valuations. Using the midpoints of management’s guidance, the stock trades at an EV/EBITDA of 29.5 times and a price to sales of 3.8 times, so a premium valution, even with the high growth continuing to be forecasted.  The company has a target of 10 million subscribers over the next 5-6 years, the current valuation puts weight on that target.

Slide #10

Concluding, this is the classic growth stock scenario of a strong underlying operations with high historic growth, but the main bull-bear division is if growth can continue at such a high rate. The stock has traded at a premium and continues to be, but is this premium over stating the growth prospects going forward? I would say the company at its current price does not offer the margin of safety to make it overtly appealing given the GLP-1 tailwinds dissipating, yes, the company does have a liraglutide product upcoming and yes, awesome of the current GLP-1 users will switch, but to what degree is the question right now, and further, what degree of halo effect of the GLP-1 treatment being loss will impact new subscriber growth. At the end of the day, we are GARP investors and while Hims may have the Growth, it doesn’t have what I believe is the reasonable price at this time, so we will continue to monitor the company going forward.

YSOT Enterprise Group – Ed (Client & fellow Oiler Fan)

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Enterprise Group Inc. (E:TSX)

Company Description:

Provide specialized equipment and services in the build out of infrastructure for the energy, pipeline, and infrastructure construction industries.

Presence across Western Canada with a concentration in Alberta and Northeastern British Columbia.

Their businesses include:

• Hart Oilfield Rentals – Full service oilfield site service infrastructure company including fuel, generator, light stand, sewage treatment, medic, security and truck trailer combos.
• Westar Oilfield Rentals – Also a oilfield site service infrastructure company.
• Arctic Therm – Provides flameless heaters.
• Evolution Power Projects – Newest acquisition which provides low emission natural gas powered systems and micro-grid technology, allowing clients to eliminate diesel generators entirely.

Slide #2

The stock has had a strong year, up 130%, driven by excellent financial results….. which Aaron discussed back in May 2024 when we covered the stock on the podcast last… with both the FY 2023 and Q1 2024 financial results driving the stock higher…

Slide #3

But as Aaron discussed back in May 2024 when we covered the stock on the podcast last… energy services companies can be VERY volatile… as shown by the company’s long term historical stock performance where the stock took a drastic decline in 2014/15 when we saw energy prices decline.

Slide #4

Now looking at the most recent financial results which were for Q3 2024, ended September 30th, 2024:

• Revenue was $6.8M, a decrease of 24% from the same quarter last year. Management noted that for the first 9 months of FY 2024 they saw an increase in activity levels. However, Q3 saw a reduction in activity with management attributing it to (1) apprehension and preparation for a potentially sever forest fire season leading some customers to delay the execution of planned projects to the end of the forest fire season. (2) Some customers took advantage of summer months to allow employees extended time off to prepare for busy times ahead.
• Even though Q3 saw reduced activity, general activity levels are higher than in 2023, and management expects increased activity to continue through the remaining of 2024 and into 2025.
• Given the reduction in revenue, gross margin was down to 37% from 46% in Q3 2023.
• Adj. EBITDA declined 47% to $1.8M
• And net income was a loss of $200K, compared to a gain of $1.6M for the same period last year.

Looking at the balance sheet, the company has $8.1M in cash, debt and leases were $27.6M, providing a net debt position of $19.5M or a trailing net debt to EBITDA multiple of 1.3x… which I would say isn’t bad or concerning… but as listeners know, we would certainly prefer the company to be in a net cash position..

Slide #5

But I also need to mention that the company did issue 15 million shares at a price of $1.90 per share, which provided the company gross proceeds of $28.8M… which should place the company back in a net cash position. And the company plans to use the funds for continued expansion plans as well as for general working capital.

This follows their previous financing of 8M shares at a price of $0.85 for gross proceeds of $7M in March 2024…

And I believe this most recent issuance is getting the company to an outstanding share balance of approximately 77M shares outstanding.

Slide #6

Quickly looking at the valuations the company is trading with a trailing P/E of 15x, a P/CFO of 11x and an EV/EBITDA multiple is approximately 12x. And this compares to a trailing valuation of about 9x earnings and 6x EBITDA when Dunn covered them last in May…

So the valuation multiples have been increasing – clearly given the weaker Q3 earnings – so its probably good to see the company issuing shares at higher levels in the $1.90 range.

But again when we are looking at the valuation of a micro-cap oil and gas services company we would expect to see lower valuations – typically below 10x earnings – but of course this is all conditional on the growth level and visibility of the growth… and growth has clearly been strong over the past 3 years… But again, when we are dealing with a cyclical business we would want to see this shown in the valuation.

So I would say that at this point the valuation is maybe more on the  higher side when looking at the trailing results – given the recent weaker Q3 which management believes is somewhat one off… but there could be some uncertainty looking forward given the oil and gas tariffs which could further delay some investment activities in the sector.

Slide #7

Now another piece of recent news that I would like to highlight is that Enterprise announced an exclusive agreement with FlexEnergy Solutions – which is a global OEM manufacturer of microturbine power generation equipment, which places Evolution power as the sole provider of short-term turbine and micro-turbine application s across all commercial and industrial sectors in Alberta and B.C. So under the 5 year agreement Evolution will exclusively provide its turbines and will help customers go from diesel generators to more efficient natural gas generators. And when we spoke with management in September they told us that the Flex Turbine generators are much more effective in cold temperatures… so they believe it is a significant advantage that they signed this deal.

And they also noted that they have about 15% market penetration of the sites that they could be in with their natural gas turbines, so they think that they have a good runway to grow this to about 66% penetration over the next few years… so this is essentially the runway of growth that they believe is ahead of them beyond the current typical demand from the Canadian oil and gas sector.

Slide #8

Conclusion:

• In 2018, Enterprise Group transitioned to move from diesel generators toward natural gas. generators. Management considers themselves to be the leader of low emission electrification systems in Canada. And this was recently bolstered by their exclusive 5-year agreement with FlexEnergy.  (And they note that there is competition in the U.S. for these types of turbines but not in  the Canadian Market).
• The company has produced strong growth over the past 3 years with strong trajectory. Gross margins have been increasing due to less need for field techs given switch to natural gas generators.
• Q3 2024 was weaker which management expected (fires in Summer 2024), and management believes activity in the space to remain high through the rest of FY2024 and into FY2025.
• The balance sheet is healthy and should be back in a net cash position following the December 2024 equity issuance. In September management noted that they would like to get back into a net cash balance sheet to maintain growth. And really I don’t love seeing dilution as it will evidently make it harder to grow per share EPS… but at least the company was issuing shares at higher valuations.
• The trailing valuation multiples are not cheap in my opinion at 15x EPS and 12x EBITDA. But gain this was due to a weaker Q3 which was expected.

I think its an intriguing business with a runway of growth and attractive fundamentals driven by an upswing in the energy patch over the past few years. But my biggest concern is whether growth can continue in a space that has been historically cyclical. And whether companies will be putting off investment decisions given tariff uncertainties which could impact the business’ recent acceleration in growth.