June 2021 Update – $CSW/A.to, $OSS.v, $PSD.to, $IDG.to, $STC.v, $MCB.to, $MTLO.v, $SVT, $FXC.to, $URB/A.to

Happy Canada Day to my fella Canadians and Happy Independence Day to my friends south of the border.

TIKR

I use TIKR to quickly look through ideas and check comparable companies. Would recommend. Referral code below.

https://app.tikr.com/register?ref=smob7c

Thoughts on Market Activity

Really nothing new to report here. There is a still a debate on whether or not the spike is transitory or not. I don’t know. That’s it. Most commodities have rolled over to some degree, except oil and nat gas which have been strong. It will be interesting to see how long or to what degree we reopen if there is still 25-30% of adults with vaccine hesitancy.

Looking at my portfolio at the moment… I am looking to reduce the amount of companies I hold. I have too many small positions that are somewhat distracting given how much they will move the needle.

What I’m Reading

Deep Work by Cal Newport

I really enjoyed this book and have been trying a few suggestions from the book. I have been scheduling my day in 30 min blocks that consist of either shallow and deep work. I have also removed much of my presence from social media. At least, I don’t check my Twitter timeline, but I will continue to utilize and check my DMs. I’ll give it a try for a month or so and see how it goes.

I also like to read books on parenting and relationships. Message me if you’re interested.

Posts this month

Developments on Companies Mentioned

  • Corby Spirit and Wine Limited – $CSW/A.to & $CSW/B.to
    • Lawsuit filed against them
      • Lawsuit filed on black discoloration near the warehouse
      • They stopped managing the warehouse june 30, 2020
  • OneSoft Solutions – $OSS.v
    • New teaming agreement
      • First from Worley via Advisian
      • First in Australia
      • Began trials in March 2020
      • I found this interesting from the PR
        • Hossein Khalilpasha, Advisian Principal Integrity Engineer and Asset Integrity Lead stated, “The case studies we performed demonstrated that our analysis of clients’ data using CIM with machine learning is not only more accurate, much faster and less costly for clients, but also provides state-of-the-art 3D visualization of pipeline data that empowers engineers to surface and contextualize pipeline conditions and threats that legacy integrity management systems and processes used today do not rival.”
  • Pulse Seismic – $PSD.to
    • Burgundy has been selling shares
      • Sold 360k shares
      • Still own 5.2 mil shares or 9.7%
  • Indigo Books & Music – $IDG.to
    • Reported annual results
      • Really hard to judge the business given the lockdowns in place throughout the year
    • CEO bought about 440k worth of stock at these prices
    • Though the business has proved resilient, the business does not attract me at these prices and I will not be updating it moving forward.
  • Sangoma Technologies Corp – $STC.v
    • CEO made a couple of small purchases during the sell off
  • McCoy Global – $MCB.to
    • Announced the formation of a special committee after AGM
      • I view this as positive
      • I think if they shopped this investor deck around outside O&G and an existing business they would have gotten a substantially higher valuation
  • Martello Technologies Group Inc – $MTLO.v
    • Reported fiscal Q4 2021
      • Market didn’t like it
      • Hit by fx
      • Rev up yoy with GSX acquisition
      • Adj ebitda worse yoy
      • Sounds like they have lots of promise in the future
      • Still monitoring
  • Servotronics – $SVT
    • Lawsuit filed against the CEO and the Ontario Knife Company
      • CEO has been placed on administrative leave
      • Gotta love microcaps
  • FAX Capital – $FXC.to
    • Announced the renewal of NCIB
      • Up to 1.5 mil shares or 10%
      • Daily limit of 14,758 shares
    • Investment in BioSyent
      • They own just over 2mil shares or 16.69% of the common
  • Urbana Corp – $URB/A.to

Hope everyone is having a wonderful summer and gets vaccinated.

Dean

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$ISDR update

A year ago I wrote a post on Issuer Direct. Since then the shares have done well and are up about 130%. This compares to the Russell 2000 and Nasdaq which are up about 60% and 40% respectively. It’s easy to take a victory lap here, but really I should have purchased more shares as the company executed and shares were still well below $20.

Update

ISDR has been to navigate the current landscape very well and capitalize on the WFH/remote climate. They quickly pivoted their product development to service customers in the new environment by offering virtual meetings and investor conferences.

They have managed to grow customer count throughout 2020, particularly on the private company side.

Initially, my thoughts were that many small and medium sized public companies would migrate to ISDR products. My thinking was that public companies would utilize ACCESSWIRE (as a standalone or through a Platform id subscription). The more I learned about the business, the more I appreciated the potential, at least in the short to medium term, is with private companies.

Given how underserved private companies are, product development and marketing have been focused here. A couple of new products are expected to be launched later this year to drive new customer growth as well as ARPU. As well the company continues to invest in ACCESSWIRE with the recent addition of e-commerce.

Valuation

I know valuation is a curse word in 2021, regardless a quick look at valuation shows that ISDR has managed to catch a bid. Though not cheap, this isn’t something that is overpriced in my mind.

Looking at forward (2022) estimates the numbers look a little more appealing. Of course, such estimates could be off so take them with a grain of salt.

Long Term

Looking to the future, I would expect more customers to become subscribers to Platform id. This gives an indication that customers are not just utilizing ISDR for infrequent use of a few products, but that on the aggregate the customers see value in utilizing much (if not all) of the Platform id suite.

As of Q1 the company had 386 Platform id subscribers with a goal of hitting 500 by end of the year. This is a metric I will be watching closely.

Risks

  • In the short term, the company continues to expand headcount and invest in R&D. This could lead to some operating margin compression until they scale into the new expenses.
  • The new products (newsroom and brand asset manager) could be delayed or adoption could be slower than expected.
  • The company could execute well, but the valuation could contract.
  • Q2 2021 is when the tougher comps present themselves and shares could churn sideways for awhile if the market expects higher growth rates than ISDR provides.

Conclusion

I continue to hold my shares and am looking to average up as the opportunity presents itself. I consider ISDR a core holding as part of my portfolio. I believe there is lots of white space for the company and wouldn’t be surprised if a larger competitor attempts to gobble ISDR up. As well, they could use cash and/or lever up the balance sheet a bit for an acquisition.

Anyone else follow ISDR?

Cheers,

Dean

*I am long ISDR at time of writing.

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Firan Technologies Update – $FTG.to

The last time I did a write up on FTG was July last year. Since then shares are up about 90% which is well ahead of the TSX. Shares really took off at the end of April/start of May 2021 on the back of heavy volume. Of course, I don’t own shares. However, this is well behind AMC, GameStop and pretty much all crypto (which I also don’t own). Rather than mulling over not buying shares a year ago, I’m going to take another look at FTG and walk you through some of what I do when monitoring a company.

Update

Covid was not easy on this business from a operational and a product demand standpoint. The defense portion of the business looks stable as it’s supported by government funding and not likely to be cut during a downturn. Commercial aerospace demand was the obvious point of uncertainty. All the large manufacturers have cut production and look to take a few years to return to pre-pandemic levels. On top of this the company had a few covid specific flare-ups at a couple of facilities that led to some production stoppages.

This doesn’t sound like a recipe for the shares to nearly double, but the market is forward looking and perhaps this was all factored into the price previously. When things looked the most uncertain was when the risk to the business was at a low. Of course, government support has helped them manage the pandemic.

Outlook

The outlook has moderated as the vaccine rollout looks to be taking hold. Yes there are the variants, but they (so far) have not derailed the hard work of getting needles into arms. Boeing and Airbus are still expecting lower production in 2021 and into 2022. Despite the reopen in the US and Europe, many coutries are still in the middle of their vaccine rollout.

Valuation Looking Ahead

It’s easy to look at a price chart seeing FTG double in price and assume that you’ve missed the move. I know I have a very hard time looking at each business with both eyes open and judging the offer from Mr. Market at that point in time without anchoring to what I could have purchased shares for previously.

Though shares have done well, the company is not expensive on an absolute basis. They never trade at SaaS level multiples, but looking at historical valuations there is still room for some multiple expansion.

I think using previous multiples with some discretion is a reasonable way to judge upside to downside ratio. All this data is available via TIKR.

Downside

For downside, I’m using price to tangible book and enterprise value over est 2022 revenue. This is using 110 mil in rev and about 50 mil in tangible book value. For reference, 2019 revenue was 112 mil and is about 97 mil currently.

FTG doesn’t trade much below 0.5-0.6 ev/rev unless we look way back to 2012-2014 when the business wasn’t as profitable and had less facilities. I’m going to use 0.5 ev/est. 2022 rev as one downside scenario.
In addition to the ev/rev, I’m going to utilize price to tangible book as the other downside scenario. 2020 was the cheapest the business traded for a long time based on this metric. I’m going to use 1.35x the last stated tangible book value as the other downside scenario.

Upside

For the upside, I’m going to focus on two measures of profitability, EBITDA and FCF. I’ll EV/est 2022 EBITDA and price to pre covid FCF to take into consideration the balance sheet (at least to some degree). The reason I’m using 2022 ebitda is I believe that the income statement predictions are a little more thought out by analysts than the cash flow. Using historical data and the forward estimates, I think the use of 14 mil in ebitda is reasonable. For cash flow, I’m using pre-covid numbers of about 9 mil. This doesn’t include working capital adjustments. As well, FCF doesn’t include the Colonial Circuits acquisition made in 2019.

Though FTG has traded higher than 6x ev/ebitda, it seems to gravitate towards that number over time. I want to be reasonable in my expectations, so I’ll use 6x 2022 estimated ebitda.
The FCF numbers don’t go back quite as far as the other valuations, but there is still enough data to draw a reasonable conclusion from it. I’m going to use 8x FCF.

Upside:Downside

Given the above we get an upside to downside ratio of 1.5. Not high enough for me to pull the trigger here. I prefer a 3 or 4:1 ratio. Of course, this is just looking at the company right now knowing what we know. The valuations used are historical and the company may trade at a premium to these multiples as the business grows and liquidity increases.

This purely mechanical exercise has the potential to miss so many things. Some that come to mind are:
  • The company could use it’s cash to purchase another facility at discounted rates.
  • The commercial aerospace part of the business could bounce back quicker than anticipated and vaccines rollout.
  • The defense business could see more growth than anticipated.
  • Variants could turn out to be worse than anticipated and full reopen could be delayed.
  • There could be some specific issue with a facility in the business.
  • The government support could be removed substantially faster than the business environment normalizes post covid.

Summary

FTG is a company I’ll keep a close eye on. From my perspective they have a strong market presence with a management team that understands capital allocation. Though it is somewhat cyclical, the business does generate ROE and ROIC well above it’s cost of capital over a full cycle. The balance sheet is strong and their is potential to expand the business in a depressed environment. As well the CEO owns substantially more than his annual salary in shares.

I will continue to monitor FTG.

Anyone own FTG or have any opinions?

Dean

*I don’t own FTG at this time

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