Tag Archives: STC

March 2021 Update – $OSS.v, $REPH, $ISDR, $PSD.to, $ISV.to, $STC.v, $FTG.to, $VMD.to, $SYZ.to, $MTLO.v, $DWSN, $SVT, $FXC.to, $PZA.to

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I was a guest on In The Market Trenches podcast this past month. Have a look/listen.

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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 how the broader market seems to continue to rotate out of “what worked in 2020”/SaaS/lockdown names and into “recovery” companies. The S&P ended up 7.4% YTD, while the TSX ended up 6.7%. The Russel 2000 has now outperformed the Nasdaq comp over the ttm. The disordered pace of covid vaccine distribution seems to be creating lots of noise. As well, there are many that are very concerned about variants and their implications on the healthcare system. It is interesting to experience in real time. This goes without even mentioning NFT, crypto, EVs, etc. Such things I have no business commenting on.

I continue to find some interesting opportunities in more cyclical companies, although these usually amount to more and smaller positions. As always looking for businesses with long term potential, with incentivized management and a reasonable valuation is the main goal and will constitute the largest amount of my energy. Of course, building positions in such businesses takes continuous effort on the bid as they tend to be illiquid.

Building wealth in the most reasonable way for me is not always the optimal way in the short term.

Posts this month

Quick Notes on Companies Recently Mentioned

  • OneSoft Solutions ($OSS.v)
    • Announced an acquisition of IP
      • Not a ton of details
      • They are usually very thorough on MD&A’s so likely to get more color then
    • Posted Q4 2020 results
      • In line with my expectations
      • MD&A is a must read to understand the value proposition
  • Recro Pharma ($REPH)
    • As mentioned before, I have sold but continue to monitor
  • Issuer Direct ($ISDR)
    • Released Q4 2020
      • Results were good
      • Continue to hold my position
  • Pulse Seismic ($PSD.to)
    • Reported auditor change
      • Non event as it was board approved
    • Lots of volume on March 12
  • Information Services Corp ($ISV.to)
    • Released Q4
      • Business is holding up well
      • Margins have ticked up a bit
      • With the Paragon acquisition they are getting more revenue from services
      • Some delays due to covid, but it didn’t sound like anything major
      • Interesting company
  • Sangoma Technologies Corp ($STC.v)
    • Officially closed the acquisition of Star2Star
  • Firan Technology ($FTG.to)
    • Polar Asset Management sales
      • 528k shares sold from Jan 8 to Feb 12
      • About 50% of the trading volume
      • They now own about 9% of the outstanding shares
  • Viemed ($VMD.to)
    • Reported Q4
      • Still executing well
      • The covid related one time revenue will run off
      • Call indicated that they can return to historical growth rates once we are fully reopen
  • Sylogist ($SYZ.to)
    • Received conditional approval to list on TSX from TSXV
    • Acquisition of MAS (Municipal Accounting Systems) and new credit line
      • 37.8 mil in cash
      • 7.4 mil rev
      • 4.3 mil ebitda
      • Will be immediately accretive
    • Held a call after the acquisition
      • Will list on TSX shortly
      • Integration of MAS 90-120 days
      • Key employees staying on post integration
      • Investing in sales and marketing to expand MAS geographically
    • Announced they will list on TSX
  • Martello Technologies Group Inc ($MTLO.v)
    • They announced a private placement concurrent with the bought deal
      • This was closed and mgmt. participated for about 1 mil
    • I have sold my shares at a small loss and will move on
      • I will continue to monitor for a few quarters
    • Announced strategic sales win
      • It sounds quite positive
  • Dawson Geophysical ($DWSN)
    • Reported Q4
      • As expected rev way down
      • Potential to recover further with O&G activity
  • Servotronics ($SVT)
    • Filed a notification of inability to timely file their 10-K (deadline was March 31)
      • Micorcaps are fun
  • FAX Capital ($FXC.to)
    • Announced a placement with QUIS
      • 16 mil shares at $1.25 for 20mil total
      • 1 year lock up
      • Able to nominate a board member
      • They should still have lots of cash left over after this
    • Closed Carson Dunlop acquisition and placement with QUIS
      • Also appointed a president (graham Badun) of a new platform company
      • Was president of Alarm Force
    • Q4 results posted
      • No surprises
      • Estimating they have about 45% cash in book value after the acquisition of PEO
  • Pizza Pizza Royalty Corp ($PZA.to)
    • Reported Q4 2020 – Not much to report
      • Ontario and Alberta have been under fairly strict lockdowns during the back half of the quarter
      • Non traditional is hurting
      • Payout ratio was 84%
      • They feel they can grow store count by 5% in 2021

The author is long $OSS.v, $ISDR, $PSD.to, $STC.v, $VMD.to, $FXC.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.

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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Sangoma Technologies Star2Star Update – $STC.v

On Jan 31, 2021 Sangoma announced the acquisition of Star2Star. This is their 10th acquisition and largest to date. It definitely transforms the company. Remembering Sangoma’s humble beginnings is not easy given how much the business has grown. I wanted to do a post to help synthesize my thoughts at this time as Sangoma has grown in complexity and the business had already stretched my circle of competence.

The company held a conference call to review the transaction with investors and put a powerpoint in their website. They require a special shareholder meeting to get approval.

They also released fiscal 2021 Q2 last night and held a conference call today that added a little more detail.

All numbers are in $CAD

Star2Star backgroud

  • headquarted in Florida
  • 10,000 customers, largest client is about 5% of revenue
  • has around 260 employees
  • privately held
    • 58% owned by employees (including founder), 15% is NewSpring Capital, other 27%
    • NewSpring seems quite sophisticated at first glance, here is a link to the companies they have partnered with
  • ttm rev of $107mil
  • 80%+ subscription based
  • 80%+ gross margins
  • balance growth and profitability (similar to Sangoma) with adj ebitda at 19mil (about 18%)
  • over 99% retention rate
  • they are a pure play cloud provider where Sangoma is on-premise and cloud based
  • their software is developed in house and is cloud native – meaning it is designed to be used on the cloud
  • they have a multi channel approach
  • they have a large focus on Mid-market and Enterprise value segments (this is a opportunity for Sangoma)

Rationale

Service and Product Portfolio

As discussed on previous conference calls, the CEO mentioned that customers are looking for a fully integrated provider for their unified communications needs. This concept has been coined UCaaS – unified communications as a service. They want that “one-stop-shop”. He has alluded that the focus on the business and future acquisitions will be on building out the product portfolio and channel opportunities for Sangoma. The acquisition will allow Sangoma to be a single provider with more options for cloud based, on-premise, or a hybrid of both.

The combined company will offer the most complete solution on the market.

Customer Mix

As mentioned before Star2Star has a focus on mid-market and enterprise customers, where Sangoma has been focused on SMB. Sangoma can leverage their larger international exposure of over 125 countries to market the Star2Star products which are focused in the US. The international market is generally underserved relative to the US from a cloud based solutions standpoint.

It should be noted that though cloud gets lots of love, there are still many new customers that request on-premise solutions both domestically and internationally. Sangoma already has a robust on-premise unified communications solution and now has a much more comprehensive cloud based option (or hybrid) should new customers request it. As well, it should be easier for existing customers to migrate to the cloud from on-premise.

Go To Market Strategy

Sangoma had some opportunity in various channels. This slide from the presentation goes over the pro forma channel avenues.

Market Opportunity

The combined company will now be consider top tier in industry and increases Sangoma shareholders to the faster growing cloud communications space. The increased top line will give Sangoma additional scale to support their growth strategy.

This gives Sangoma a complete fully integrated suite to take to their existing international markets which are underserved by the cloud. It also gives them a large mid-market and enterprise customer base.

Transaction Details

  • total consideration of $560mil
    • 5.23x rev
    • about 30x ebitda
    • 6.5x recurring rev
  • $135 mil in cash on closing
  • 110 million shares of Sangoma – $426 mil or so
    • 22 million shares on closing
    • 88 million issued in 14 quarter instalments starting April 1, 2022
      • I think this is a great piece on aligning both teams that may be overlooked

Combined Entity Leadership and Integration

Given that Star2Star is already a well run profitable business the integration risk is lower than some of the previous acquisitions. There are no major cost synergies planned. The opportunity is in upside synergies of the combined company.

Bill Wignall remains as CEO of the combined entity. The board will consist of 5 directors with the founder of Star2Star Norm Worthington becoming chairperson. NewSpring Capital’s Marc Lederman (an existing large shareholder in Star2Star) will also get a spot on the board.

Initial integration will include the low hanging fruit like HR and legal. More nuanced integration initiatives (marketing, R&D, etc) will take place slower and more methodically.

Pro Forma Financials

It should be noted that Sangoma reports in IFRS and Star2Star reports in GAAP so this isn’t an exact science.

  • 221 mil shares total
  • 245 mil in rev
  • 70%+ recurring rev
  • 70%+ gross margins
  • Adj ebitda of 44mil or 18%
  • expecting debt to ebitda of 2.4x or 101mil, which is quite conservative given the high recurring revenue and profitability
  • NewSpring will own about 6% of the total outstanding shares
  • Norm Worthington will own almost 25%

Initial Thoughts

I will be honest, even after executing 9 acquisitions at Sangoma I still always take time to process the acquisitions once they are announced. As an investor who gravitates to quantitative valuations the purchases tend to seem expensive. Having said that, this seems reasonable to me. The Star2Star team has build a strong business in a market that is fast growing, adds value to stakeholders and is very sticky. If Sangoma was able to pick up Star2Star at less than 10x ebitda or less than 3x revenue I would actually worry about the sophistication of the Star2Star team or the quality of the customers. I doubt you can find something with such high recurring revenue, high gross margin, steady growth, founder led, and high profitability for much cheaper. As well, both teams are incentivized to execute and remain onboard for several years.

I feel that Sangoma is getting better and better at cultivating a shareholder base that aligns with the business strategy. I still remember the days when shareholders used to yell at mgmt on the conference calls for not buying back shares when they traded less than NCAV.

Valuation and Potential Re-Rating

I would be remiss if I didn’t mention valuation, after all I own a business not a ticker symbol.

As it stands, the shares are still halted, but will trade on the 8th. I actually expect shares to open down based on my previous experience. There might be some shareholder churn in the near term.

If the shares remain flat then Sangoma will trade at the following.

The powerpoint has a slide on the potential re-rating of the share price relative to peers in the cloud communications space.

I will let the reader decide whether these are appropriate peers. As highlighted they will/do trade at a discount to these peers. I did a little digging and gathered a little more information around profitability and growth rates of this peer group.

Sangoma has one of the lower growth rates (I used organic growth and tried to strip out acquisitions) but they haven’t resorted to nuking the income statement to grow aggressively at any cost. Having said that, I am not sure even if they spared no expense I’m not knowledgeable enough to know what their growth rate would had they spared no expense.

It should be noted that Sangoma is more profitable than most, but these types of businesses do not usually trade on traditional profitability metrics.

What has to happen to make money from here

  • I believe that in order for the shares to re-rate permanently Sangoma needs to list on a major US exchange. They have committed to making that a priority this year.
  • The acquisition also needs to happen as intended, with no major customer churn.
  • Given the valuation, I think the broader market needs to be stable in order to Sangoma to re-rate. A major sell-off would likely pull down Sangoma’s share price.

Risks

  • typical integration risk that comes with an acquisition
  • there could be some upset shareholders in the near term
  • valuation is not cheap here based on traditional metrics, so there is a chance that the business performs well but the share price does not
  • the new shareholders could sell their shares as soon as they start trading and drive down the share price in the near term

Sangoma released a material change doc today and I’ll dig into it this weekend.

That’s it from me. Anyone else own Sangoma or have any thoughts?

Thanks,

Dean

*the author is long STC.v at time of writing

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