Q3/21 Canadian Small-Cap Industrials Preview TD Investment Conclusion
Canadian small-cap industrial companies will start reporting calendar Q3/21 results on November 9. We have updated our FX, fuel price, economic growth, and commodity price assumptions, as well as other modelling updates. The net impact of these updates are immaterial to our financial forecasts. We are maintaining our BUY recommendations on Exchange Income (unchanged $53 target price) and AirBoss of America (unchanged C$47 target price).
Exchange: Our Q3/21 forecasts are in line with consensus. We forecast that revenue will continue to show sequential improvements, reflecting the contribution from acquisitions as well as improving organic growth as Exchange's end-markets recover from the pandemic. We believe that Exchange's performance throughout the pandemic highlights the ability of the business to support the dividend (5.2% yield) and capital expenditures without degrading the balance sheet, while maintaining the flexibility necessary to capitalize on potential acquisition opportunities. The coverage of maintenance capex and the dividend with cash from operations during one of the most challenging operating periods in history should provide confidence to the market in the normalized earnings and cash flow potential of the overall business, and be positive for long-term valuation multiples.
AirBoss of America: With preliminary Q3 results released on October 18, we do not anticipate any meaningful surprises from the full Q3 disclosure. Rather, we believe that any outlook commentary will be a more important factor for near-term share price direction. We forecast that revenue will increase at an 18% CAGR from 2019 through 2023 and adjusted EBITDA at a 37% CAGR. We estimate that this will be achieved while maintaining positive FCF and without having to take on heightened financial leverage or dilute shareholders in a meaningful way - EBITDA per share is forecast to increase at a 31% CAGR over this period. We believe that AirBoss' strong balance sheet, dividend, and growing exposure to global demand for personal protective equipment make it an appealing investment. We believe that its Defense segment is increasingly well-positioned to drive strong earnings, while its legacy Rubber Solutions and Engineered Products segments regain momentum.