Today we kick off with a mixed bag of topics including some notable announcements from Rogers and OPEC’s agreed production cut, in our Your Stock Our Take Segment we review a viewer question on profitable and growing TSX Venture listed specialty pharma stock BioSyent Inc. (RX:TSX-V). And in our Stars and Dogs of the week we review this year’s largest Canadian IPO, retailer Aritzia Inc. (ATX:TSX) and industrial chemical manufacturer Canexus Corporation (CUS:TSX).
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Now, let’s dig into the show.
I would like to welcome again, myhost, KeyStone’s Senior Equity analyst, father of 1, and a man who is crossing his fingers in hopes this will be the year he finally gets a chair to turn on the 11th season of NBC’s The Voice,, Mr. Aaron Dunn.
Rogers made some notable announcements this past week…
Cancelled their Shomi streaming video service. The video-streaming stepchild of Shaw Communications and Rogers which was launched just under two years ago, as homegrown competitor to NetFlix – the service will be shutting down on Nov. 30.
It appears Shomi just could not compete for the content and – It really shows Netflix’s status as a dominant international brand in the video streaming industry as the “Kleenex of the category.”
The first mover advantage here has been huge…
How long will Bell’s Crave TV last?
Rogers also announced it will cut some long-standing magazine print editions and sell some publications – it is another bell tolling for traditional print media.
The company said Friday that the magazines Flare, Sportsnet, MoneySense and Canadian Business will go exclusively digital starting in January. Their content will be available on the web and through apps.
Beginning in January, Maclean’s will go from a weekly publication to a monthly, with new content posted digitally each week. Chatelaine and Today’s Parent will produce print editions six times per year, instead of a dozen.
We hope there is still room for high quality-vetted content – it just appears it will be delivered in different formats and vetted by the crowd rather than traditional editors via sites such as Reddit – which remains a private company…but has recently raised capital from investors such as rapper Snoop Dogg and actor Jared Leto – could we see another new media IPO in the near-future…Snoop might like to “drop it when its hot”. Sooner rather than later.
Last week, OPEC announced – Agreed to its First Oil Output Cut in Eight Years
OPEC is, of course, the Organization of Petroleum Exporting Countries, which is a union of oil producing countries that regulate the amount of oil each country is able to produce. OPEC members include Saudi Arabia, Iran and Iraq. The group is said to account for 40% of current oil production.
The lower end of the production target equates to a nearly 750,000 barrel-a-day drop from what OPEC said it pumped in August — more than half the forecast increase in global oil demand this year.
Oil jumped more than 5 percent in New York after ministers said the group agreed to limit production to a range of 32.5 to 33 million barrels a day.
So does this mean we should all get out there and start buying oil stocks?
An important thing to keep in mind as well is that this has become a supply driven market as opposed to the demand driven markets we saw when oil was above $100. In demand driven markets, supply is just trying to catch up whereas now we are in a situation where supply has to be controlled in order to stabilize prices. So even if this deal that OPEC did moves prices a little higher, there is definitely a cap on where the price can go. When we see prices creep much beyond the $50 to $55 range then I would expect production in the US to start ramping up again which will put more supply onto the market.
Caution:
1) OPEC has a poor record at enforcing quotas. A number of the countries have a hard time agreeing with each other on topics as simple as the sky being blue.
2) It has been noted that today, U.S. shale oil producers ramp-up extraction as prices approached $50 a barrel, which puts a cap on the increase until demand truly picks up.
3) Russia is becoming an increasingly large producers – recently smashing a post-Soviet oil-supply record, pumping 11.1 million barrels a day in September, up 400,000 from August.
I will permit Aaron to take this one… as you should be…
Your Stock Our Take
About BioSyent Inc. (RX:TSX-V)
Listed on the TSX Venture Exchange under the trading symbol “RX”, BioSyent is a profitable growth-oriented specialty pharmaceutical company focused on in-licensing or acquiring innovative pharmaceutical products that have been successfully developed, are safe and effective, and have a proven track record of improving the lives of patients.
BioSyent – Focuses on products with less than $20 million annual peak revenue – fly under the radar of BIG PHARMA – we see value in this strategy and the company has already executed it well.
Future Product Pipeline
The Company is committed to expanding and accelerating its product pipeline with a focus on innovative products that are unique. The Company is currently in discussions with several potential partners for new product opportunities in the prescription drug category.
As of the date of this press release, the Company has 14,066,087 shares issued and outstanding.
Highlights
Great balance sheet – As at June 30, 2016, the Company had cash, cash equivalents, and short term investments totalling $10,455,555 ($0.73 per share – 12% of market cap) , as compared to $9,715,476 as at December 31, 2015 – an 8% increase – given the premium valuation, this is a challenge.
Q2 2016 revenues increased by 22% to $4.37 million from $3.59 million in Q2 2015
Q2 2016 Fully Diluted EPS was $0.07 as compared to $0.06 in Q2 2015
Trailing Twelve Months Fully Diluted EPS was $0.27 for the twelve months ended June 30, 2016 as compared to $0.25 for the twelve months ended June 30, 2015
Look, we like the business and the focus on being profitable while growing….we have interviewed management and we like the team behind the business. Our only issue is that the stock is not cheap at present.
In fact, valuations are rich: 29 times trailing earnings. EPS actually only grew 8% over the last 12 months. This and the general negative sentiment towards pharma stocks has the stock below its highs in the $12.50 range just over a year and a half ago – at that range, the stock was overvalued, at present it appears to still be receiving premium valuations – we like the business long-term but would like to see it a little less expensive before we bought near-term. The international expansion is intriguing for long-term growth.
This Week’s Star – Aritzia Inc. (ATZ:TSX)
Started trading on the TSX Monday up 10%!
Based out of Vancouver, British Columbia, Aritzia is a design house and fashion retailer of exclusive brands for women aged 15 to 45 – my girlfriend who loves Aritzia, will be happy to know she falls well within the target market. Founded in 1984, Aritzia now has 75 retail stores across North America, and eCommerce business, aritzia.com. Aritzia Inc.
Aritzia’s growth has been excellent- WE LOOKED AT THE NUMBERS – for the past 12-years the company has posted compound annual revenue growth of 20.6% – excellent track record.
Net income is growing at a rate of around 32% over the last 4 years.
All of this lead to Aritzia being the Biggest Canadian IPO of the year – however, this was not too difficult as the 2016 IPO market has been well, crickets basically….
We have heard that the IPO 10 times over subscribed with fashionable investors trying to get their hands on the shares…largely due to a true lack of good retail or consumer stories in Canada.
We do see some red flags in the IPO and in Arizia as an investment at current prices.
1) The proceeds from the financing (between $380 – $437 million), are going mainly to the founder and a private equity fund…none of the cash will be kept in the company – so this may impact growth – there may be another financing coming – so we caution this….
2) Despite the fact that the private equity fund is cashing out to a degree by selling the IPO shares, Boston-based Berkshire Partners and Aritzia founder Brian Hill, retain about 97 per cent of the voting power through multiple-vote shares, which weren’t part of the IPO. We are not fans of this structure and caution that it leaves common shareholders at a disadvantage.
3) Current valuations are very high –the company trades at around 40 times trailing earnings.
4) $143 million in debt and just under $10 million in cash. The debt is sustainable given cash flow, but to grow more aggressively the company will have to lever up (something we do not like to see in the fickle retails space) or offer up more shares for sale.
The company has significant growth targets over the next 5-years – if goals are reached, the company should provide a tidy return, but we see no need to jump in on the company on IPO – given the redflags we mentioned. We will monitor it.
THIS WEEK’S DOG – Chemtrade Makes Bid for Canexus
· Yesterday, Chemtrade Logistics, symbol CHE.UN, made an official offer to purchase Canexus (symbol CUS).
· Both companies are in the industrial chemicals business.
· This is interesting…we have been covering Chemtrade for almost 4 years now in the Income Stock Report.
· It is a pretty boring business but it pays a very nice dividend yield and has stable cash flow profile.
· About every 2 to 3 years the company does a big acquisition which moves cash flow per share higher.
· Chemtrade’s share price has been pretty stable as well although it hasn’t done a lot over the past 1 to 2 years.
· I’m not 100% sure about this transaction.
· I’ll defer to management of chemtrade as they know the chemicals business and these assets better than I do.
· But one thing I have liked about Chemtrade is that their business has been so stable over the years.
· We did a long-term analysis on the cash flow going back over 10 years and the volatility was pretty minimal even during the financial crisis in 2008.
· We have little to no concerns about the company being able to maintain the dividend.
· Canexus on the other hand appear to be a totally difference story.
· They were the market favorite 2 years ago but since then the share price has declined 85% due to several management blunders.
· I believe management has been changed up at least once over this period, assets have been sold, the dividend has been cut and then eliminated.
· But Canexus over the years has not demonstrated the stability in cash flow that Chemtrade has.
· Looking at Canexus’ recent financials, operating profit is down 14% year to date; last year it was up around 10% and the year before that it was down 12, so there has been a lot of volatility.
· The balance sheet right now is a mess with nearly $600 million in debt (twice the market value of the company) and $350 million of that being short term debt which means it due over the next year.
· There is a big working capital deficit.
· Clearly Chemtrade is looking at this as an opportunity to purchase assets on the cheap.
· Chemtrades offer equates to a valuation of about 8.5 times this year’s operating profit which given the debt level doesn’t sound that cheap to me.
· It is only a 20% premium to the price at the time of offer and Canexus’ board of directors doesn’t seem to like it.
