Tag Archives: MCR

July 2021 Update – $OSS.v, $REPH, $PSD.to, $STC.v, $FTG.v, $XTC.to, $VLN.to, $RELL, $SVT, $FXC.to, $MCR.v

TIKR

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

They have created a global screener which is great. I recommend playing around with it. Lots of data.

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

Thoughts on Market Activity

Not much to report. The fear of runaway inflation seems to have cooled off to some degree at least for the short term. The delta variant (and uncertain vaccine effectiveness), vaccine hesitancy, staggered global reopening, and the summer doldrums have let to some choppiness over the last month.

My personal underperformance continued this month and for the full quarter. The main culprits are overweight positions in Sangoma Technologies and Viemed. The remainder of the portfolio has outperformed the indexes on the aggregate. Both will have news out soon and it will be nice to get an update.

What I’m Reading

I have been focusing on some more leisure time with family and strength training. Looking for book recommendations.

I am continuing my social media break (mainly Twitter). I continue to only use the app to check DMs. I’m convinced there is value in the app, but I will need to get better at cultivating a timeline that is valuable or considering any time on the app as entertainment and limit it accordingly.

Posts this month

None – sorry ☹

Developments on Companies Mentioned

  • OneSoft Solutions – $OSS.v
    • Share price has been weak lately
      • I think investors are getting impatient and looking for some very material announcements regarding revenue growth and getting to break even
  • Recro Pharma – $REPH
  • Pulse Seismic – $PSD.to
    • Big quarter
      • Rev up to 19 mil
      • Biggest quarter in several years
    • Paid off a bunch of debt
      • Paid of high cost subordinated debt
      • Paid back some of their revolving facility
      • At end of June they only have 4 mil in debt left
  • Sangoma Technologies Corp – $STC.v
    • Provided a business update for Q4
      • Rev of 167 mil
      • Ebitda to exceed 30 mil
      • This bodes well for integration of Star2Star
  • Firan Technology – $FTG.to
    • Reported Q2 fiscal 2021
      • A little weaker than I expected
        • Toronto facility had higher than normal absenteeism due to Ontario gov having a program to increase paid time off
        • Other locations also down
        • Tough simulator comps for this year
      • A bit of currency headwind
    • Still monitoring
  • Exco Technologies – $XTC.to
    • Reported fiscal Q3 with an easy comp last year
      • Outlook was positive
      • Expect capex to exceed $40mil in 2021, which means almost $15mil in Q4
        • Continued to see increased capex in 2022 and likely 2023
      • They set out some 5 year targets
        • 10% rev growth
        • Higher EBITDA and Net Income as well
        • $1.90 EPS in 2026 with no acquisitions
        • New programs, market growth, and market share gains
  • Velan – $VLN.to
    • Reported q2 fiscal 2022
      • They guided for a weak quarter but it was still weaker than I expected
        • Supply chain issues
      • Backlog highest since 2012 and working capital is ramping to meet demand
      • Continuing to hold and give them a couple more quarters to execute before drawing conclusions
  • Richardson Electronics – $RELL
    • Very strong fiscal Q4
      • Guidance was also strong
      • Sounds like lots of opportunities across the 3 different business lines
      • Will be interesting to see if they maintain this momentum
    • Received a patent for wind turbines
      • This is the ULTRA3000
      • A direct one for one replacement of GE batteries and chargers and can be installed with no modifications
  • Servotronics – $SVT
    • Noted this in the 10-K – The Company determined that its previous disclosure regarding management’s evaluation of the effectiveness of internal control over financial reporting was inaccurate as such evaluation was not based on a suitable, recognized control framework in accordance with Exchange Act Rule 13a-15(c).
    • Gotta love microcaps
  • FAX Capital – $FXC.to
    • Nothing new to report but trading at about 0.77x book which is a discount to peers
  • Macro Enterprises – $MCR.v
    • Gate City bought another 2.7% of the company
      • Now owns 15.3% of the outstanding

Feel free to reach out.

Dean

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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

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

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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Macro Enterprises – $MCR.v

Here is a quick idea for those interested.

Company: Macro Enterprises

Ticker: $MCR.v

Price: $2.40

MC: 75 mi CAD

EV: 80 mil CAD

Background

Macro Enterprises Inc., together with its subsidiaries, provides pipeline and facilities construction, and maintenance services to companies in the oil and gas industry in western Canada. It is involved in the construction, alteration, repair, and installation of pipeline and facility pressure piping, and structural steel facilities, as well as provision of pipeline integrity digs services. The company was founded in 2006 and is headquartered in Fort St. John, Canada.

As noted above, they are heavinly dependent on Western Canada. Construction activity here relies on more traditional O&G, pipeline, and LNG facilities and related infrastructure.

Managment & Operations

Frank Miles founded Macro in 1994. He is the current CEO and comes acrross as quite conservative on how the business is run. They traditionally have low debt loads and reinvest cash generated into the business.

Compensation seems reasonable for a company this size.

The company is based in western Canada and has a local presence. They employ local workers including unionized and first nations. The company has worked in western Canada for many years and has experience with the terrain, seasons and various building conditions.

Large construction company’s must have a strong safety record which MCR possesses. The repeat business with large clients is a testament to the work they have put in build relationships. The specialized work can lead to margins above industry peers.

Construction companies like this are interesting as they can be lumpy and tend to provide an opportunity.

You can see the share price take off in 2013. This corresponds with the increase in business activity and the company’s profitability. The company’s earnings continued until 2016 when construction activity in western Canada dried up. It loosely tracks the price of oil produced in Alberta, Western Canadian Select (WCS) which is delivered at Hardisty as well as the natural gas price.

For those unfamiliar, Alberta’s oilsands produce nearly 3 million barrels per day. The oil produced is “land-locked” and is sent via pipeline, rail and truck. Continued production with limited pipeline capacity and the heavy crude being less ideal for refiners to process has led to WCS trading at a discount to WTI.

Ownership

The CEO owns 9.2 mil shares or about 27% of the outstanding shares. Mike Nielsen (VP) also owns over 1% of the company. Other holders of note are Gate City Capital at 11.7%.

Balance sheet

As expected the majority of assets are comprised of fixed assets. PPE (net of depreciation) has historically been over 40% of stated assets. I think it’s important to monitor working capital as well.

In order to win business, MCR needs a large modern inventory of equipment. Though salvage prices likely fluctuate during boom/bust times, the use of tangible book value I believe provides a decent proxy for replacement value at a minimum. They also have significant real estate and maintenance facilities that it likely understated on the balance sheet.

Income Statement & Cash Flow

Now that we have that out of the way, below is a quick look at the income statement in ttm for MCR. I don’t think looking at this business (or really any business) on a quarterly basis is a good idea.

Earnings are lower than the recent peak but are not quite as low as the previous downturn when the was EBIT negative. As with many cyclical companies, there tends to be floor in the valuation based on trangible assets.

Downside Price

The chart shows the company can trade at well under tangible book value during downturns. It goes as low as 0.50 P/TB in 2016, but hovers around 0.60. I think this represents the downside potential if activity does not return (or return for some time).

Though the company does lose money, they do not tend to bleed a ton of cash for an extended period.

At a stated value of $3.32 per share and a multiple of 0.60 gives us a downside potential of $1.99 or approximately 20%.

Upside

I think it’s important to make an estimate of what the potential is if activity returns. Looking at previous cycles to get an indication of where MCR could trade provides an upside scenerio.

In 2019 EV/EBITDA hasn’t been much higher than 3x. It’s pretty much the same story for 2014/15. The chart is hard to read as they trade at high multiples of EBITDA in downturns.

EV/Rev can be another indicator and also apears to be trading below mean, but higher than the lows.

The company recently stated that they anticipate 2021 to have at least 250mil in rev. We can take an estimate of what EBITDA will be based on history. I get about 36mil using previous gross margins and operational cost requirements. There are few estimates from analysts stating 32-34mil in EBITDA in 2021. Any additional increase in revenue will mean even more upside.

TMX Pipeline Expansion

The Canadian government purchased the in 2018 from Kinder Morgan.

Therer has been some interesting developments frecently with their JV and Trans Mountain. MCR has written off the JV in the quarter ending Dec 2020. They are still entitled to recieve 20 mil in cash by end of Q2 2021. I have no opinion on the matter other than what has been stated by MCR management. There was a contract signed with Trans Mountain in Feb 2021 for an initial value of over $50 mil CAD. I think this bodes well for their ability to win contracts as the expansion continues.

I believe that the TMX expansion continues (even if it’s over budget). There really isn’t a reason to replace MCR as a contractor at this point in the project. The increased capacity will be a major benefit to Canada as a country as oil is a largest portion of our trade and the oilsands are the 3rd largest proven reserve of oil in the world.

Risks

  • Activity could remain lower (or go lower), particularly in western Canada.
  • The business could perform well, but may not reach the multiples that I have indicated.
  • The tangible book value of the assets that I am relying on for my downside scenerio could be worth less than stated.
  • MCR may win contracts with the TMX expansion, but margins may be lower than previous projects that I am using to benchmark my analysis on.
  • One must acknowledge the polical risk with pipelines and hydrocarbons in general. Decisions made by political leaders are not always based on sound economic decisions and you never know if the TMX could end up in the political crosshairs.
  • Environmental reasons specific to the work MCR provides specifically. Here is a recent example.
  • There is no dividend to support the share price if earnings don’t materialize.
  • There is not a meaningful NCIB presence.
  • The CEO (Frank Miles) has been at this for 30 years. If he decides it’s time for a transition, there could be some additional uncertainty in the business.

With a 4:1 upside to downside ratio, I think MCR is worth a position here. The CEO runs the business conservatively and has skin in the game.

NGTL is of particular interest to MCR as will connect natural gas from BC and AB to major LNG export points. I think a project win from the NGTL pipeline project(s) would propel the shares higher as this would ensure meaningful equipment utilization for MCR.

Big thanks to UV for the collaboration on MCR.

Anyone else own or have an opinion on MCR? Stockhouse has some good information on MCR.

Thanks,

Dean

*the author is long shares of MCR.v at time of writing.

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