Third Quarter 2023 Earnings Preview
The third quarter earnings season is about to kick off for small Canadian public companies. TSX-listed companies have until mid-November to report, while TSX Venture-listed companies have until the end of the month.
Are you expecting any surprises? Who’s going to beat expectations? Who’s going to disappoint?
Here’s what I’ll be watching for!
Underdogs to Watch
Kraken Robotics (TSX-V: PNG)
Kraken is a marine technology company providing complex subsea sensors, batteries, and robotic systems to the military and commercial markets. The company’s guidance for 2023 calls for revenue of $66 to 78 million and EBITDA of $12 to $17 million. So far, after six months, revenue stands at $16 million and EBITDA at $4M. The shortfall in the first half implies that the second half of the year should show robust revenues and earnings.
The current valuation is around 7 times EBITDA (based on $14.5 million in EBITDA, the mid-point of the guidance). This company has consistently grown revenue 50%+ over the last 6-7 years (except in 2020 due to COVID).
Clearly, the market doesn’t believe the guidance and doesn’t believe that Kraken can keep growing in the coming years despite an already strong backlog of orders for delivery in 2023 and 2024. Investors could be in for a surprise.
Boardwalktech Software (TSX-V: BWLK)
Boardwalktech has developed a patented Digital Ledger Technology Platform currently used by Fortune 500 companies running mission-critical applications worldwide.
Earlier this year, the company provided guidance for its fiscal 2024 (ending March 31, 2024), which called for revenue of $8.5 to $10 million. The midpoint of this range represents growth of 43% over 2023.
After reporting $1.55 million in revenue in its first quarter, the guidance requires a solid acceleration to an average of $2.3 million or more in the remaining quarters to hit the low point of the guidance. Again, it feels like the market doesn’t believe it.
The current valuation is slightly over 2 times annual recurring revenue (ARR). If they reach their guidance, it looks like the valuation will drop well below 2 times ARR based on the increase in revenue. Given the recent acquisition of HS GovTech (similar business model) for 3.5 times ARR, Boardwalktech would appear quite appealing.
Potential Disappointments
Biorem (TSX-V: BRM)
Biorem is a leading clean technology company that designs, manufactures, and distributes a comprehensive line of high-efficiency air emissions control systems to eliminate odors, volatile organic compounds, and hazardous air pollutants.
Biorem reported underwhelming results in the first half of 2023, with revenue down 30% compared to the previous year. The company seems to be experiencing delays in sales and deliveries of projects due to inflation. These are long lead-time projects, and the timing of deliveries is often out of Biorem’s control. Despite these setbacks, the stock is pretty much flat this year.
It’s hard to tell when these delays will abate. In the meantime, I foresee potential continued pressures on revenue and earnings. Given the company’s strong backlog, I would expect a strong rebound at some point in the future (which might well be next quarter and make this prediction look foolish!)
Imaflex (TSX-V: IFX)
Imaflex manufactures polyethylene (plastic) film and bags, including metalized plastic film, for the industrial, agricultural, and consumer markets.
The company already published a string of disappointing quarters since late 2022 due to softer demand in its end markets. Following its second quarter of 2023 results, Imaflex’s management was optimistic that the market softness would stabilize and lead to stronger performance in the second half of 2023.
However, based on an analysis of other public peers who have already reported their September 30th quarter and provided forward guidance, I believe the macro environment could remain soft for a few more quarters. Imaflex investors might have to wait a little longer for improved financial performance.
Flying Under the Radar
Spectra Products (TSX-V: SSA)
Spectra is a vertically integrated manufacturer and supplier of innovative products and services to the commercial transportation industry.
It has a tiny market cap (~$4 million) and is totally under the radar. The company has been quietly growing revenues in the last several quarters and did so profitably. For the first half of 2023, revenue and net income before tax were up 72% and 154%, respectively. The company also has a rock-solid balance sheet (for its size) with over $1 million in cash and no debt.
It is one I’m watching closely for signs of continued, sustainable growth.
I hope everyone has a productive and profitable earnings season, with strong execution from your portfolio companies.
What are some of the companies you’ll be watching this earnings season?
I’ll make a recap next month to see how my predictions turned out.
Stay tuned!
Disclaimer
This publication is for informational purposes only. Nothing produced under the Stocks & Stones brand should be construed as investment advice or recommendations. Mathieu Martin, the author, is employed as a Portfolio Manager with Rivemont Investments. This publication only represents Mathieu Martin’s own opinions and not those of Rivemont. Rivemont may own positions and transact on any securities mentioned in this publication at any time without prior notice. At the time of this writing, the Rivemont MicroCap Fund holds a position in Kraken Robotics (TSX-V: PNG) and Imaflex (TSX-V: IFX). Always do your own research and consult a professional before making investment decisions.
Good article. A notable developmemt for Kraken was the recent retirement of its founder/CEO. The market might still be in the process of digesting that news. Great small company though which I follow!