Opinions
James Hodgins
Pason Systems Inc.
PSI-T
WAIT
Dec 30, 2019
Stock price when the opinion was issued
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Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Strong year expected for PSI. Industry wide higher drilling activity expected. Strong improving margins and free cash flow. Dividend raised by 50%. Unlock Premium - Try 5i Free
A small-cap that supplies information to oil/gas-drillers. Shares tanked when drilling ceased during early Covid, but have rebounded. They hold $200 million cash in the balance sheet, which is how they survived. Drilling levels have returned to 2015 levels. They have endured. Earning are way up and commands strong market share in Canada with some in the U.S.
(Analysts’ price target is $20.25)In Q4, PSI missed EPS expectations of 29c coming in at 11c. Revenue beat expectations of $89.26M coming in at $93.93M but did decrease 1% year-over-year. Industry activity levels in North America, decreased by 19% year over year, while revenue per industry Day increased by 12% in that same period to $998, posting a new record quarterly level. The weaker results on a yearly basis reflects the inflationary effects on the Company's high fixed cost base for its drilling related business units, higher levels of lower margin sales from its solar and energy storage segment, and the inclusion of equity accounted losses related to supporting the rapid growth of Intelligent Wellhead Systems (IWS). Free Cash Flow increased significantly from $3.7M in year prior to $19.3M in the Q4 of 2023 with lower levels of working capital investments and capital expenditures year over year. PSI also increased its dividend 8% in the quarter. PSI continues to face industry related pressures related to lower levels of drilling activity which are hurting earnings and revenue but as these subside the company should perform better. The dividend increase was a good signal that PSI is still generating comfortable cash returns even while demand is slower.
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PSI develops drilling rig instrumentation and date management systems. It trades at 11x earnings, under 3x book value and supports a 30% ROE. Analysts like that the company retains two-thirds of its cash flow into business development. The company is prudently using some cash reserves to retire debt and buy back shares. The dividend is backed by a payout ratio under 33% of cash flow. We suggest setting a stop-loss at $15, looking to achieve $20 -- upside potential of 17%. Yield 2.9%
(Analysts’ price target is $19.67)