Tag Archives: IDG

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.

TIKR

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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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Indigo Books & Music $idg.to

We all love to hear the success of founder run companies. Fintwit is full of support for founder run companies and how they can bring their company from the garage to a multi billion dollar business. There is even an ETF ($BOSS) that specifically holds founder run companies. It has outperformed the S&P500 since it’s inception in February 2017.

Well, I’m going to take a dive into a company that doesn’t quite fit that template.

Indigo Books & Music (mostly recognized as Chapters to Canadians) operates brick and mortar retail stores (almost exclusively in Canada) and an online store through indigo.ca. The company has been public since before the turn of the millennium. They merged with Chapters Inc in 2001.

The company CEO is the founder of Indigo since it’s inception in 1996. I’ve owned IDG in the past and made (a wee bit of) money. I still loosely follow out of interest.

The shareholders have had a bumpy ride to say the least. Shares are down 75% since they began trading and down about 90% over the last 12 months.

Bring a competitor to Amazon has not been easy for Indigo. They have had some periods of strength over the last decade.

Operating Performance

Given how seasonal the business is, it’s best to judge operating performance on an annual basis.

Revenue is on the right (secondary axis). This isn’t a compounder bro stock.

Going head to head with Amazon on price would be foolish. The company has had to pivot to remain as profitable as they have. They have had to close under-performing stores aggressively while promoting general merchandise in store as well as online.

Traditional Retail

As mentioned the store count has had to be rationalized over the years.

The large superstore count has been pretty flat while they have cut out net about 60 small format stores. Their total square footage is about flat from 2008 but it’s down roughly 10% from the peak in 2018.

They have had some success driving revenue higher per square foot, but remember their annual results showed higher revenue in 2017, 2018, and 2019 although overall profitability hampered in 2019.

As mentioned they have been shifting to general merchandise from print. The strategy is to match (or closely match) Amazon on price with books and drive margin higher with general merchandise and experience in the store. They sold their share in Kobo in 2011 for $315 US.

2017-2019 seems to be an example of driving revenue higher without an eye for expenses doesn’t work in this business. They spent much of fiscal 2019 and 2020 cutting redundant expenses cutting back on less productive promotional material, including repatriating a design studio from New York, while keeping as much margin as possible. They have gone from burning cash to generating it, or at least they did before covid hit.

Ownership

Most of the board owns little shares. The CEO is also chair and personally owns 98,000 shares. Her spouse is also on the board and owns aver 50% (directly and indirectly) of the shares outstanding. A couple other institutions own around 20%, but they are less than 1% of their assets.

Compensation (pre-covid)

Many executives have a total compensation package of around 1 million per year. The CEO’s salary was 1 million alone in 2019.

Covid Impact

They lost at least two weeks in fiscal Q4 due to covid lockdowns. The quarter was progressing quite well before the shutdowns and they feel they were on the path to sustained profitability. This is among the hardest hit with the lockdowns and the effects will linger for awhile. They had around 120 mil in cash at the end of Q4, which in prior years was criticized as too much. Minimum lease commitment for fiscal 2021 is 67 mil. They are negotiating with landlords during covid and have decided that 15 small format stores will not renew leases after June 2020.

Since the covid lockdowns hit they are trying to manage the cash burn: (from most recent MD&A)

• ceased its normal rent payments as of April 1, 2020 and is in negotiations with its landlords regarding rent-abatements;
• assessed and leveraged applicable government business support programs for COVID-19, including the Canada Emergency Wage Subsidy;
• extended payment terms with many of its vendors and plans to reduce its inventory levels while maintaining an optimized assortment;
• implemented a cost reduction plan to minimize non-essential operating costs;
• reviewed the capital investment plans pre-dating COVID-19 to account for the widespread economic impact of COVID-19;
• suspended much of its planned marketing spend in the first half of fiscal 2021;
• reviewed its head office workforce model and commenced certain role restructurings;
• froze salary increases and elected not to pay discretionary fiscal 2020 annual incentive plan bonuses; and
• the Chief Executive Officer elected to temporarily forgo her salary.

Valuation

Obviously looking at profitability metrics during the pandemic is probably not productive. They are likely to lose money for the next few quarters even with some forgiveness from landlords and assistance from the government, but I could be wrong. They will have to be nimble to navigate this climate without blowing up the balance sheet. Under “normal” circumstances they should be able to generate 70mil in CFFO before capex. I think maintenance capex is minimal in the business, but this doesn’t include lease payments.

Today they have a market cap of less than 30mil which is about half of tangible book value. To say that there are little expectations on IDG isn’t a stretch. There were no analyst questions on the most recent call. If they survive and things go back to normal this feels like a situation where they can earn their market cap today in cash in 2-3 years time. They could also have to raise cash at a very poor time.

If you do take a position, I would watch it closely and likely use a mental stop loss at which you dump your entire position. To me, this isn’t the company to put a large portion of your portfolio into. It does scratch the proverbial contrarian itch. I mean being a contrarian can be fun, but (for me at least) it isn’t always a constructive use of capital.

Anyone ever look at Indigo or any retailer? They seem to have a large community presence.

Thanks,

Dean

*the author does NOT own shares of $idg.to but may initiate a position.

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