Tag Archives: FRD

May 2021 Update – $CSW/A.to, $OSS.v, $REPH, $ISDR, $PSD.to, ISV.to, $STC.v, $VLN.to, $VMD.to, $SYZ.to, $MCB.to, $FRD, $FRII.to, $MTLO.v, $DWSN, $FXC.to, $PZA.to, $MCR.to

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Thoughts on Market Activity

Another busy month.

This month continued the debate on whether or not the current inflation readings are transitory or more permanent. I’m not smart enough to know. Most seem to be over the worry about covid in the first world.

Personally, my portfolio took it on the chin this month. Bigger holdings in $STC.v and $VMD.to are the main culprits. I continue to believe in both businesses over the long term so I continue to hold. I’m still finding some interesting ideas, but they are more cyclical or neglected with lots of uncertainty.

Posts this month

Developments on Companies Mentioned

  • Corby Spirit and Wine Limited – $CSW/A.to & $CSW/B.to
    • Reported fiscal Q3 2021
      • In line with expectations
        • Lots of lockdowns so in person dining is hit
        • But people still drinking
        • At about 4.8% yield
          • They’ve have issued special dividends before, as things recover and cash builds on the balance sheet, they may do it again as they now have almost $3 per share in cash
  • OneSoft Solutions – $OSS.v
    • Reported Q1
      • A little below my expectations
      • Last year had a large amount of data uploaded which led to a very tough comp
      • Still holding
  • Recro Pharma – $REPH
    • Reported Q1 2021
      • Results were better than expected
      • They provided full year guidance and the market reacted well
      • the business seems to have bottomed and having the visibility for full year results is a positive
  • AWM announced an initial position
    • 4.8 mil shares
    • I’m assuming they picked some up during the recent issuance
    • Can’t find a ton of info on the fund, but this does not look like a top 10 holding for them based on the last round of 13F’s
  • Issuer Direct – $ISDR
    • Reported Q1
      • Rev up 32%
      • Profitability up yoy and flatish from Q4
      • Outlook was positive
  • Pulse Seismic – $PSD.to
    • Announced a data license agreement for 17mil
      • Immediate rev of 7.3mil
      • Remaining 9.7mil by April 15, 2022
      • YTD rev (17.2) is way ahead of full year 2020 rev
  • Information Services Corp – $ISV.to
    • Reported Q1
      • Better than expected
      • The real estate market in Sask was stronger than I expected
      • It will be interesting to see what the rest of the year looks like given that the seasonality weak quarters were strong and there may be some demand pulled forward in parts of the business but also other parts (Paragon for example) are being held back due to stimulus
  • Sangoma Technologies Corp – $STC.v
    • Reported fiscal Q3 2021
      • Weaker than expected due to stronger CAD
      • Star2Star integration going fine
      • Not much detail on uplisting at this point
  • Velan – $VLN.to
    • Released fiscal Q4 2021
      • Way weaker than I expected and shares tumbled on the day
        • Production issues in north America from selling the plant earlier than expected in 2020
        • Delays due to covid and supply chain interruptions
      • Backlog is up so it’s nice to see demand for their products
    • Still holding, going to regroup on this one
  • Viemed – $VMD.to
    • Reported Q1
      • A little weaker than I was expecting
      • Guidance was pretty good
      • I really like the adjacent initiatives they have to drive customer value
  • Sylogist – $SYZ.to
    • Reported Q1 2021
      • Was weaker than expected
      • Seems like a mix of currency headwinds and covid lockdowns
      • I still follow and am curious if they can find some more acquisition candidates
  • McCoy Global – $MCB.to
    • Reported Q1 2021
      • Was weak as expected
      • Continue to develop their product suite to support a fully automated TRS (Tubular Running Services) for end of 2022
  • Friedman Industries – $FRD
    • Ault Global Holdings announced a 416,000 share position or 6%
      • They have gone activist on company’s in the past and this will be interesting to watch
    • Provided Q4 guidance and new faciility
      • Expect earnings in Q4 to be 9.5-10.5 mil and EPS $1.37-1.52
        • The most profitable in history
      • Steel prices have been moving if you haven’t noticed
      • New facility
        • 21 mil cost
        • Estimated 3 million ton capacity
      • New equipment in Decatur
        • Started in May 2021
      • Shares have performed really well – wish I have bought some
  • Freshii – $FRII.to
    • Reported Q1 2021
      • Weak as expected
      • They seem to be gaining some traction with the app and some omnichannel opportunity
      • Q2 will likely be weak as lockdowns in Canada persist, although likely not as weak as Q2 2020
      • Canada is doing well with administering vaccine and many provinces are talking about reopen, FRII now has to demonstrate how they can succeed in a more normal environment
  • Martello Technologies Group Inc – $MTLO.v
    • Launched cloud-based mulit0tenant Microsoft 365 monitoring platform
      • Sounds like this will be meaningful to revenue in 2022
  • Dawson Geophysical – $DWSN
    • Reported Q1 2021
      • Weak as expected though better sequentially
      • Maybe see a bounce in activity if oil remains at these levels
    • I’ve stopped following the company closely as the shares are continuing to trade above NCAV
    • I’m going to stop providing updates from this point on as this is really just a NCAV play
  • FAX Capital – $FXC.to
    • Announced Q1
      • Book value up 6% sequentially and 24% yoy
    • Held AGM virtually – some interesting points
      • Approved the amended voluntary measures by-law
        • This gives them a little more flexibility on positions allowing for up to 2 holdings to a max of 25% of assets (each)
      • They are happy with the pace of cash deployment
      • They have monetized two investments which had led to cash on the balance sheet being higher than expected
      • I don’t think I understood the potential they see in Carson Dunlop
        • They gave some additional color on the call which was appreciated
  • Pizza Pizza Royalty Corp – $PZA.to
    • Reported Q1 2021
      • As expected results were quite a bit weaker than last year as there was little to no covid impact in Q1 2020
        • Most of their markets had delivery and pick-up only for the quarter
      • Noted they are looking to grow the restaurant base by 5%
      • The tone on the call was more positive than typical
      • As Canada continues with it’s vaccine program we should see reopen happen slowly
  • Macro Enterprises – $MCR.v
    • Announced Q1 2021 and AGM
      • Confirmed min 250 rev for 2021

Dean

*Long $OSS.v, $ISDR, $PSD.to, $STC.v, $VLN.to, $VMD.to, $MCB.to, $FRII.to, $FXC.to, $MCR.to at time of writing

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Feb 2021 Recap – $CSW/A.to, $REPH, $ISDR, $PSD.to, $ISV.to, $IDG.to, $STC.v, $FTG.to, $XTC.to, $SYZ.to, $FRD, $FRII.to, $RELL, $MTLO.v, $DWSN

Holy cow this month was busy.

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Thoughts on Market Activity

Once a month I write in my investment journal to attempt to capture my current thoughts on the public markets. It’s not a forecast and I am not a macro guy. It is a quick snapshot of what is happening in real time and how I’m processing it.

This month I made note of Reddit and meme stock phenomenon. Also, layering on the uncertainty with covid and the lockdowns. For the first half of the month there seemed to be a record number of victory laps being taken and many are now regretful that they were not fully invested (or beyond fully invested) in tech/SaaS/WFH stocks over the last 6-9 months. On a personal note, I had never been trolled so hard from non-finance people for asking about risk when they mention hot stocks. The end of the month seen some of the market darlings (my proxy being ARK ETFs) look like they are rolling over. What I find interesting about this is that many of these companies could see their market cap drop by 60-80% and still be considered expensive by traditional financial metrics. I must admit I have had a harder time than ever staying on task and keeping on productive activities.

Posts this month

Company Updates

  • Corby Spirit and Wine Limited (tse: $CSW/A.to & $CSW/B.to)
    • Fiscal Q2 2021 released
      • Rev and gross profit down a bit vs. last year
      • Opex was down a bit as well
      • Nets out to pretty flat EBIT
      • 5% dividend
      • EV/FCF around 10
      • 12ish P/E
  • Recro Pharma ($REPH)
    • Renaissance Technologies disclosed a 5.8% position
      • interesting development thought doesn’t seem meaningful
    • Portolan Capital Management disclosed a 5.5% stake or 1.3 mil shares
      • This does not look like a meaningful position for the fund
    • management additions
      • looks like a (very) small amount of portfolio
    • amendment to credit facility
      • debt reduced to 100mil from 116mil
      • interest rate reduced by 1.5%
      • the reduced portion of the term was exchanged for $9 mil in shares of REPH
      • they now deleverd by 25mil in the last 4 month
    • Released Q4 2020
      • The quarter was below my expectations
      • They posted negative gross margin and went through about 5 mil in cash before capex or changes in working capital
      • Guidance was for stronger Q1 rev
    • Also filed an S-3 to issue up to $30mil to Aspire Capital
      • There is a limit of 6.2mil shares allowed
        • There are about 23mil shares outstanding at the moment
      • Uses volume weighted average price (VWAP)
        • Minimum price of $3.43
      • Can’t be more than $500K per day
    • I have sold my shares – the position size was not worth the headache and I need to clear my head
      • I will continue to monitor for 2 or 3 quarters as part of my feedback loop when buying or selling
  • Issuer Direct ($ISDR)
    • Polar Asset Management filed that they sold their 325k shares
      • This is about 8% of the outstanding
      • The shares have absorbed the sale really well
      • Not a material event for me given how well the business is performing
    • Announced a platform upgrade
      • Should help drive Accesswire adoption over time
  • Pulse Seismic ($PSD.to)
    • Reported Q4 2020 results
      • Better than expected
      • Rev down a little
      • Shares have been performing well YTD
  • Information Services Corp ($ISV.to)
    • QV Investors picked up some more shares in Jan 2021
      • This is the first time I’ve seen them active in ISV since 2016
    • Provided an update and outlook for 2021
      • No hard numbers were given for guidance
      • They are expecting Registry and Services to have lower volumes than normal in 2021
      • They are expecting Services to perform well
      • Technology experienced some delays but seem to be chugging along as best they can remotely
      • Trading at 9x ev/forward ebitda for a very strategic asset
  • Indigo Books & Music ($IDG.to)
    • New president announced
      • Leading the “Living with Intention” and transforming the business model
      • He has experience in different types of retail and managing brands
    • Reported Q3 results
      • Did better than I expected given all the covid lockdowns over the holiday season
      • Keeping operating margins here may prove to be a challenge as the support programs may come off quicker than activity returns
      • Having said that they are leaner then when the pandemic first hit
  • Sangoma Technologies Corp ($STC.v)
    • see post from the month
  • Firan Technology ($FTG.to)
    • reported fiscal Q4 2020
      • results were better than I expected
      • there is a fair bit of uncertainty in their market right now
      • seems cheap with what the potential could be with lots of cash
      • it looks like 2021 (and forward) defense budgets will remain
      • 2021 visibility on simulator sales is low right now and could we weighing on the share price
      • might do a formal revisit
  • Exco Technologies ($XTC.to)
    • Released fiscal Q4 2020
      • Results were better than I expected
      • Raised their dividend a bit
      • They seem to be executing well and are now trading at single digit ev/forward ebit
      • I know this isn’t SaaS or EV or crypto or anything sexy, but this company seems to be turning the corner and warrants a closer look
    • NCIB announced
      • 9.5% of total outstanding
  • Sylogist ($SYZ.to)
    • released Q1 and held a virtual meeting
      • results were in line with expectation to me
    • the core business is quite profitable
    • new CEO may be a driver for higher growth whether organic or inorganic
    • something to monitor
  • Friedman Industries ($FRD)
    • Renaissance Technologies LLC announced they own share
      • 543,752 shares 
      • 7.72% of Friedman Industries Inc..
    • Reported Q3 2021
      • Good quarter
        • rev up a little, while tons sold (in the coil segment) was down a bit
        • gross margins way up
          • higher steel prices and sale of a steel derivatives contract
          • increased throughput
        • some equipment changes are starting to pay off
      • was bouncing around NCAV price, now at a slight premium
  • Freshii ($FRII.to)
    • Held AGM and reduction of capital for the A shares was approved
      • The NCIB starts in March and is approved for up to 10% of the public float
      • If they execute the maximum per day repurchase they will still only hit about 65% of the total approved
        • They are allowed to execute a block purchase
    • Q4 results came out
      • Business is obviously weak due to covid lockdowns
      • They maintain a strong balance sheet and have the same level of cash as they did before the pandemic began
      • They seen positive trends at the start of Q4 vs. Q3 but further lockdowns took the wind out of their sails
      • I’m expecting Q1 to be weak as well
  • Richardson Electronics ($RELL)
    • Renaissance Technologies disclosed an 8.13% position
      • interesting development
    • has performed well YTD and still trades at a discount to NCAV
  • Martello Technologies Group Inc ($MTLO.v)
    • Reported fiscal Q2 2021
      • Below expectations and shares immediately dropped about 7%
      • Negatives
        • Opex is up due to some reopening and investing in marketing
        • Organic growth lower than expected due to legacy business declining quicker than anticipated
        • Still have high cost debt
        • Share structure is not ideal
      • Positives
        • This legacy business (much of it LiveMaps that came over from GSX) is now 17% of rev
        • MSFT DEM growth sequentially
        • 96% of revenue is recurring
        • 1.49 MRR at quarter end
        • Less than 4x MRR vs peers north of 10+
        • Mitel related revenue up slightly
    • Announced $5 mil bought deal at 0.195 with a half warrant
      • Disappointed in this as I thought they didn’t need the cash immediately and would wait until there was visible organic growth (and a higher ARR multiple) before raising
      • I haven’t added or sold any material amount of shares and this remains a small position for me
  • Dawson Geophysical – ($DWSN)
    • Renaissance Technologies LLC owns 1,741,679 shares or7.42% of Dawson Geophysical Company
      • down from 1,755,263
      • not material to me

Hope everyone is staying safe.

Thanks,

Dean

*the author has a position in $ISDR, $STC.v, $FRII.to, $MTLO.v at time of writing

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Friedman Industries – $FRD

Net-net investing is not in fashion right now and hasn’t been for a long time. It’s quite interesting how things seem to go in cycles. 12 years ago when I started there were many more investors in net-nets. I’ve been poking around a few names and finding some things of interest.

Friedman has already been mentioned by Saj here and Ben here. I don’t have much to add, but nevertheless I like the sound of my voice so here we go.

Background

The industry has not gone through a bunch of change over the last decade. Below is the income statement.

You can see they have bumped around profitability, but they have managed to keep opex fairly stable while business activity has been volatile.

The business has generated cash off and on through the last decade. You can see the large capex initiatives that have been made to drive efficiencies in operations. It’s hard to tell how much value the previous investment in capital equipment added in value.

The business is working capital heavy, primarily in inventory. It’s important to monitor turns and conversion on this business.

Current Assets

As mentioned previously FRD is heavy in working capital, but they do also have some cash on the balance sheet.

The good news is that the there is not much obsolescence risk with FRD as the finished products will likely be used and purchases will just be delayed and not eliminated permanently.

Net-Net pitfalls

There have been many critics of net-nets. They are notoriously hard to hold as they are usually bad businesses, poorly run businesses, have misaligned incentives or management that doesn’t understand the value of capital allocation (or all of the above). There are many back tests that demonstrate that having a solid net net strategy can produce above average returns. It’s a simple strategy but not easy. You need a black belt in patience to invest in net-nets. Holding onto some business that bumps along while all your fintwit friends are getting rich off crypto, SaaS, cannabis, etc. is so hard. I like to have a business where the management team is not just sitting on their hands from either an operational or capital allocation standpoint.

Friedman’s new CEO has shown a willingness to spend some excess cash on equipment to improve the business. Also, a share repurchase program for up to 15% of shares outstanding was initiated. Finally, they announced that they are going to try price hedging for the price of steel. I’m happy to see some action being taken rather than just sitting on excess cash.

Previous valuation

I took a stab at the valuation each quarter going back to fiscal 2009 for FRD. You can see that though NCAV has come down from over $8 to about $7.50, the price to NCAV has also dropped.

Purchasing at a discount to NCAV and waiting for some positive news (and a likely higher valuation) seems low risk to me. However, there is so much uncertainty with covid that things may get worse or not rebound as quickly as anticipated.

Anyone else hold FRD?

Thanks,

Dean

*the author does not have a position in FRD at time of posting, but may initiate one at any time.

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