Some Cheap Canadian Stocks (PART I)
I’ve been finding bargains harder to come by. Six months ago I was finding it almost too easy to come up stocks that were worthy of consideration. The problem then was more one of pruning. Now it seems like the stocks I find all have a bit of hair.
Rather than venturing further afar to find ideas, I’ve been looking closer to home. I have mostly ignored the Canadian market over the last year and a half. I found a couple of special situations, like Yellow Media and Extendicare, but for the most part the opportunities in the US were more compelling. But that has changed. Over the last couple of months I have been finding and adding more Canadian stocks to my portfolio. I’ve already had some good luck with the endeavour, as both Novus Energy and Ainsworth Lumber received takeover offers in the last few weeks. In the next two posts I am going to talk about some of the names I’ve been adding in my portfolio. In this one I’m going to talk again about Axia, and introduce Vecima Networks.
Axia NetMedia (AXX.to)
Axia is a stock I’ve written about on a couple of occasions (here) and lately I’ve been adding to my position in whenever it has dipped to $1.90. A major overhang has been lifted. When I wrote my last post on Axia, I highlighted the renewal of the Alberta Supernet contract in June of 2015 as my one major area of concern. Axia removed that concern last week when they announced an extension of the contract to 2018.
While the stock received a bump from the news, and at its current price is about 20% higher than when I first started buying it, it’s still not expensive. After subtracting the cash from the sale of the Spain and Singapore assets, the company has an enterprise value of about $85 million. I believe that the company can do $30 million of EBITDA in the upcoming 12 months. at 3x EV/EBITDA, with the prospect of much of that cash going straight to the bottom line (this should be a low capital business once the networks are built out), I think the stock still goes higher from here.
Vecima Networks (VCM.to)
A problem with many Canadian stocks is that they are illiquid. Vecima Networks fits that description.
I have to give a hat tip to @Dedwardssays on this one, as he introduced me to Vecima. They are a telecom equipment maker headquartered in Victoria British Columbia. The company has a wide ranging product suite. They sell legacy products (Terrace Family) aimed at converting a digital signal to an analog signal (useful for applications like older analog televisions), they sell a product (Terrace QAM) that splits a digital signal from a single source into multiple RF streams (aimed at the hospitality industry, apartment buildings, and any other place where you would need to split digital signals), they produce software defined radios, they produce a number of broadband wireless solutions, and they own a rural Saskatchewan based wireless service provider and that owns 7 (small) cable television stations in British Columbia. They also have a bunch of real estate in Saskatoon and some spectrum assets.
The company has been going through a rationalization of this asset hodge-podge. They distributed a $1 per share back in March that came from asset sales over the last year and a half. On the first quarter conference call management stated that they had $40-$45 million of assets left to sell, including $30-$35 million of real estate and another $10 million of spectrum. They also said that they would be willing to entertain bidders in the ISP. Since that time they have sold an office building in Saskatoon for $13 million, and some 2.5GHz spectrum licenses for $4 million.
The stock trades at a market capitalization of $105 million. At the end of last quarter they had no debt, $16 million of cash and another $10 million of positive working capital. As I mentioned, since that time they have added another $17 million of cash. Subtracting the cash and working capital, the enterprise value is about $62 million, with another $23-$28 million of real estate and spectrum assets left to sell.
The company has had up and down results in the past, but in the last 4 quarters EBITDA has been pretty consistent in the $4-$4.5 million range. The Terrace QAM appears to be hitting its stride, and it saw 50% revenue growth quarter over quarter. Taking the low end of $4 million EBITDA per quarter, the stock is trading at about 3.8x EV/EBITDA.
I have a small position in the stock. I’ve kept the position small because I have struggled to wrap my head around the lifespan and potential of the company’s products. The company operates in niche markets, there is not a lot of data available, and so its hard to get comfortable with projections.
Take, for example, the company’s new Fleet management system product, FleetLynx (website here). FleetLynx is aimed at tracking and maintenance optimization of vehicle fleets. The company put some numbers to the business in their second quarter conference call, saying that they expect to add about 2,000 vehicles per quarter, and that each vehicle add translated into one-time hardware sales of $300-$500 per vehicle, plus a recurring licensing fee of $30-$45 per month. These numbers tally out at $800,000 of hardware sales and $225,000 of fees per quarter, which if built upon in subsequent quarters are not insignificant numbers considering the company has total revenue of less than $100 million per year. So it could be significant.
The problem is accumulating enough knowledge to evaluate the potential success of the product and whether or not these projections are likely to pan out. I’d be guessing to attempt that. In addition to FleetLynx I run into similar problems with the new digital broadband access platform (said to start shipping commercial volumes in the current quarter), and a chip design contract (not expected to contribute to revenues for another year) that the company called a future “significant” revenue generator, but provided very little in the way of detail beyond that. These products may create material revenues in the future, but its tough to say that with confidence.
Vecima is a bet on further asset sales and that one or more of these new products pans out. Because my insights into their potential are limited, I am taking my usual approach, with a small position up front (about 2%) which will be followed up by increases on constructive news or a move up in the share price.
In the next post, which I will try to have out in a couple days, I will be talking about Entrec Corporation (ENT.to), Palliser Oil and Gas (PXL.v), and Tesla Exploration (TXL.v).
Thanks Lsigurd, I always enjoy reading your insightful posts. Looking forward to your thoughts on Tesla Exploration.
I sold my AXX.to shares today. I was reading over the Q3 report and the EBITDA numbers are much higher on a business unit then consolidated. I could be misunderstanding but after corporate eliminations, EBITDA is much lower than I thought.
Take a look starting at page 29-30.
Click to access AXX%20MDA%20Financials%20Q3%202013.pdf
Its true, EBITDA at Covage is only 50% and so its not quite as cheap as I originally thought and the price has increased significantly as well. Nevertheless, I calculated the EV/EBITDA is still under 6x even at the current price which has kept me holding. Given clarity on Alberta this seems low to me. Thoughts?
Axx doesn’t look expensive by any means but it doesn’t look cheap to me anymore. Once I see how AXX performs when Massachusetts gets ramped up (1Q-2Q2014), I could buy back at higher prices.