Stock Talk Podcast Episode 295 Show Notes

You are listening to KeyStone’s Stock Talk Podcast – Episode 295

Great to chat with you again this week. This week, as we record on Canada’s election day, Aaron kicks off the festivities with his thoughts on the Productivity Crisis in Canada. I kick off our YSOT segment with a review of electrical grid modernization company, Tantalus Systems Holding Inc. (GRID:TSX). We interviewed management last week in Vegas and report on our findings. In that vein, Brennan reports back on DIRTT Environmental Solutions Ltd. (DRT:TSX), the second of the 22 companies we grilled last week. DIRTT is profitable again, reducing debt and looking to grow. Brennan let’s you know if they may offer an opportunity. Last, and not least, Brett answers a viewer question in Celestica (CLS:TSX / NYSE), which provides electrical manufacturing services. The stock is up 100% over the past year and after reported a solid growth quarter, Brett let’s you know if the growth can continue.

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

Poll Question

YSOT Tantalus Systems Holding Inc. (GRID:TSX)

Company Description

• Smart Grid Solutions: Tantalus provides a range of smart grid solutions, including intelligent connected devices, communication networks, data management systems, and enterprise applications and analytics.
• Connected Devices and Infrastructure: This segment includes computing modules for devices like meters, sensors, and street lighting, as well as automation equipment and communication infrastructure for an industrial IoT network.
• Utility Software Applications and Services: This segment offers software licenses, hosting services, software as a service, and professional services like project management, deployment, and maintenance.
• Focus on Grid Modernization: Tantalus’s solutions are designed to help utilities transform their aging, one-way grids into multi-directional grids, making them more resilient and efficient.
• Supporting Utilities: Tantalus supports over 300 utilities across North America and the Caribbean, with a high customer retention rate.

Servicing approximately 320 utilities, the company has deployed 3.5 million connected devices, 2024 revenues were Us$44 million with ~35% from software & services, just over US$12 million in annual recurring revenues and $1.3 million in adjusted EBITDA for the last year. With a capital raise this past year the company believes it is capitalized to commercialize its next growth phase through its TRUSense Gateway.

A multi-purpose device designed for use in existing ANSI meter sockets. It allows utilities to modernize their distribution grids by providing a secure communication path, advanced power quality measurements, and support for broadband initiatives, all without requiring a complete replacement of existing metering infrastructure.

The company believes…

• $150M potential revenue opportunity from Tantalus/s Advisory Committee
• $350M approximate revenue opportunity in our qualified pipeline
• $10B total addressable market
• 10-15% growth rate of existing Tantalus business

Multiple utilities have now been demoing the TRUSense for nearly six months; first commercial TRUSense orders are expected anytime, which will validate the product’s business-case – but until they are signed, it remains speculative.

Financials

Let’s take a look at the company’s historical annual revenue and gross profit figures.

Revenues have fluctuated, but generally grown over the past 8 years – similar in terms of operation profit and income. We have yet to see an inflection point in terms of revenues – but the move higher over the past year is encouraging.

Let’s take a quick look at the company’s Q4 numbers.

Revenue increased by 21% to $12.6 million, setting a new milestone for revenue generated in a quarter. Revenue from Utility Software Applications & Services increased by 36% while revenue from Connected Devices & Infrastructure (“Connected Devices”) increased by 14%. The increases in revenue were a result of adding new utility customers and continuing to expand deployments with existing accounts. Recurring Revenue as a percentage of total revenue was consistent at 24% of total revenue in the quarter.

Gross Profit Margin increased 100 basis points to 52.4% as a result of increased contributions from the Software segment compared to the prior year period.

Income for the period was $289,000 or $0.01 per share and decreased compared to last year as a result of the $2.3 million recovery of contingent consideration from the acquisition of DLC Systems, Inc. d/b/a Congruitive in the prior year period.

Adjusted EBITDA increased to $1.4 million compared to $348,000 during the prior year period.

Balance Sheet Highlights

• Cash: $13.2 million
• Debt: $10.6 million
• Lease Obligations: $2.2 million
• Net Cash: $2.6 million (removing lease obligations)

Valuations

• 2024a EV/EBITDA: ~55x
• 2025e EV/EBITDA: ~26x
• 2026e EV/EBITDA: ~12x

The street is split on how fast the profit inflection will come and how aggressive it will be. Most are looking for a significant jump in 2026, but the orders still have to come in.

Conclusion

Interesting company (We like the space – having profited tremendously from our last electrification recommendation – Hammond Power) – the difference at this stage in relation to Hammond, we were able to buy Hammond Power at 6-8 times EPS with growth, a growing dividend and no speculation on market acceptance to power growth. We do see a path for TRUSense to add significant growth, but there also remains risk.

Trailing valuations high…but the company certainly has the potential to grow into them.

Monitor at present as it does not make our more consistent profitability criteria.

YSOT DIRTT Environmental Solutions Inc. (DRT: TSX)

Company Description

DIRTT is a provider of industrialized construction for interior environments within Workplace, Healthcare, Education and the Public Sector. DIRTT offers comprehensive prefabricated modular solutions including complete interior solutions, drywall alternative, glass partitions, casework, power, networks, floors and more. The company also has its design integration Software (ICE) which enables smart, precise design manufacturing.

Brett covered the stock in February of 2025 when the stock was at $1.18 per share and this was following the company’s Q3 financial results, but I thought that I would do a quick update given we spoke with Benjamin (CEO) in Vegas last week at the Planet Microcap conference. So if we look at the last year period the stock is up about 46%, but since its 2019 highs over 6 years ago the stock is down over 80%.

The poor stock price performance over the long term primarily comes down to a lack of profitability, as gross margins were compressed significantly in 2022, but margins have begun to recover following Benjamin Urban becoming the company’s new CEO in the summer of 2022.

Since then, gross margins have increased back to where they were pre COVID toward the mid 30% range and this is due to cost reduction measures, manufacturing efficiencies and price increases. Plus, operating expenses have also decreased due to a reduction in salaries and office costs as Benjamin reduced staff by approximately 30%.

As such, the company has now posted 7 consecutive quarters of positive Adj. EBITDA…. Posting an Adj. EBITDA margin of 8.8% in FY 2024, up from 4.4% in FY 2023.

Financials

Now looking at the recent quarter of Q4 2024 ended December 31, 2024 (all numbers are in USD):

• Revenue decreased 4% to $49 million. And annual revenue was $174.3 million which was in line with the company’s guidance range of $165-$175M.
• Gross profit margin was down slightly to 35.9% from 37.8% for the same period last year.
• Net Income was $4.0 million or about $0.02 per share, up from $955 thousand or $0.008 per share in Q4 2023.
• Adjusted EBITDA for Q4 was $5.5 million or 11% margin, up 28% from the same period in 2023.
• The balance sheet is in good health now with net debt & leases of $22.7M, but as Brett noted this follows a rights offering which they used to pay off a significant portion of their convertible debt, so you can see the business now has a forward net debt to EBITDA multiple of about 1.1x but shares outstanding have increased from about 116M to about 190M shares outstanding.

So overall I would say the business is certainly trending in the right direction.

Outlook

Now looking forward, the business is guiding 2025 toward revenue of $194-$209M (15.6% growth over 2024) and Adj. EBITDA of $18-$25M (39.5% growth over 2024) and would be a 10.7% Adj. EBITDA margin at the midpoint. But the business is looking for both revenue growth and margin expansion in the year compared to FY 2024.

I will note that this 2025 guidance does not take into account potential significant impact of tariffs, and does not include benefits from the new “integrated channel” which is essentially the company’s plan to diversify its distribution to construction contractors.

As the company is looking to expand beyond its current distribution network of “Furniture Dealers” and is beginning to onboard construction contractors. Benjamin says he has been making good headway on this new revenue diversification strategy and believes that in early 2026 – due to adding several construction partners – it will become its own line item as it will potentially represent over 10% of revenue coming in.

Looking at the valuation the stock trades with a fwd valuation of 7.4x EV/Adj. EBITDA, so I believe the company is reasonably priced, but EBITDA margins are relatively low at about 10%, so I would not expect the stock to demand a significant EBITDA multiple at this point.

Conclusion

• DIRTT appears to be trending in the right direction, with the business turning around under the control of new CEO Benjamin Urban. Costs are down, margins are up, and the business is looking at diversifying its revenue distribution channels.
• The company has approximately $400M revenue capacity with its current facilities and the ICE software platform allows the company to have a 10-day manufacturing lead time which is quite impressive.
• The balance sheet is in decent shape with a forward net debt-to-EBITDA multiple of 1.1x, although DIRTT’s outstanding shares are now up to 189M shares outstanding, but the company did recently instate an NCIB.
• Management’s FY 2025 Revenue and Adj. EBITDA guidance is promising, but there remains uncertainty around tariffs impacting the business and higher sensitivity to macroeconomic conditions due to their industry. At a fwd valuation of 7.4x EV/EBITDA, I believe the company is reasonably priced, but EBITDA margins are relatively low at about 10%, so I would not expect the stock to demand a significant EBITDA multiple at this point. But like Brett said when he covered them in February, there is a case to be made that the business offers value if they can execute going forward.

Overall, I think its an intriguing turnaround story and we will certainly be monitoring the business in 2025 as they execute on their guidance and work to add construction contractors to their distribution channel.

YSOT Celestica Inc. (CLS: TSX|NYSE)

Company Description

Celestica symbol CLS on both the TSX and NYSE, provides electrical manufacturing services, broken into two segments Advanced Technology Solutions (ATS) and Connectivity & Cloud Services (CCS). ATS includes a wide array of products and services for industrial usage to Aerospace and defence. CCS is predominantly enterprise-level data communication and information processing infrastructure, including routers, switches, data center interconnects, edge solutions, and servers and storage-related products.

The shares are trading at roughly $87 US, a $10 billion market cap. The shares of the stock have had a relatively strong year, but have come off the all-time highs set earlier in the year, and since the last coverage we had on the stock. Last time I mentioned the stock traded at a significant premium, relative to its historic self as well as peers. With the price dropping, valuations will have come down as well, but we’ll get into that in a minute.

Financials

A quick look at the last quarter:

Total revenue was up 20% to $2.65 billion, above the guided range. With the CCS segment up 28% to $1.84 billion, driven by the high-growth hardware platform solutions HPS subsegment grew 99%, to $1.03 billion. HPS is the growth driver for the business as it is focused on  AI and machine learning networking products, so it has benefited massively from that trend, underpinning any bull thesis for the company.

The ATS segment grew 5% year over year to $807 million.  The revenue split is 70/30 CCS, ATS, with HPS accounting for 39% of the total.

Non-GAAP gross margin came in at 10.3%. The company is a contract manufacturer, and low margins are normal for the industry. Adjusted Operating margin came in at 7.1%, an improvement from 5.9% year-over-year and above guided range of 6.8%.

GAAP EPS came in at $0.74, and adjusted EPS came in at $1.20, above the guided range for the quarter.

Overall, a good quarter, beating management’s guidance.

Free cash flow grew 38% to $94 million from $68 million, despite being negatively impacted by increased working capital of $46 million, compared to the prior year’s negative impact of $13.5 million. So good growth despite the increased working capital.

Balance Sheet

Shifting to the balance sheet, the company has gross debt of $887 million, net debt of $584 million, resulting a gross debt to EBITDA of 1.1x and a net debt to EBITDA of 0.7 times. The company is leveraged, but the level is not a concern at this time.

Outlook

The company has updated their guidance, shifting up the annual guidance and releasing the Q2 guidance.

For Q2:

1. • Revenue of $2.575 to $27.25 billion
   • Adjusted operating margin of 7.2%
   • Adjusted EPS of $1.17 to $1.27

These are sequential increases across the board.

For the Year, the company raised revenue outlook to $10.85 billion from $10.7 billion, adjusted operating margin to 7.2% from 6.9% and adjusted EPS of $5.00 up from $4.75, while keeping free cash flow the same at $350 million. Guidance increase is good, especially given the weak tech environment from the US trade war. The company’s guidance assumes no material to tariffs or trade restrictions, which can as we’ve seen, change rapidly. And any tariffs are passed through to customers so less direct impact to Celestica. If the company does see an impact, it would come through demand levels. As well, a decline in general macroeconomic conditions would likely impair the company’s growth, specifically if we see hyperscalers really pull back on capex, but that hasn’t occurred yet, but there has been speculation of a pullback, but hyperscalers have been reaffirming capex guidance.

Valuations

On valuations, based on management’s guidance,

• The company trades at a forward-adjusted P/E of 17.4 times
• A P/FCF of 28.6 times

Still heightened valuations compared to historic valuations, but of course, the company has seen significantly higher growth over the last few years now with the AI boom.

Conclusion

Overall, the company is more appealing than when I last covered it.

• Growth is still powered by HPS, and I wouldn’t expect that to change.
• Still a Good balance sheet.
• There is a higher macro risk with tariffs, and just a general slowdown, but the price drop has offset that, unless we do see a significant pullback in AI spend.
• The valuation is much more reasonable now, but it was trading at a premium before, so I would put it around fair value now.
• If you do see continued strong AI growth for at least the next couple of years, the stock will likely perform well, but if we do end up seeing hyperscalers pullback you’ll see downside.

So for now we will continue to monitor the stock.