Upgrades & TP Hikes - G&M Stifel analyst Ian Gillies thinks Doman Building Materials Group Ltd.’s (
) “improved margin profile creates equity torque,” leading him to raise his recommendation for its shares to “buy” from “hold” following better-than-anticipated second-quarter results.
“On the 2Q23 conference call, Doman’s management indicated that a gross margin range of 14-16 per cent is appropriate moving forward, higher than our previous expectation of 13-15 per cent,” he said. “This makes a meaningful difference to our estimates with 2023 EBITDA increasing 22.2 per cent to $208 and 2024 increasing 19.0 per cent to $201-million. Moreover, leverage on the balance sheet creates significant torque to the equity value.”
On Thursday, Doman reported revenue of $711-million and adjusted EBIYDA of $66-million, exceeding Mr. Gillies’s projections of $675-million and $48-million. Adjusted earnings per share of 34 cents also blew past his expectation of 18 cents.
“Recent housing market data has demonstrated the resiliency of the housing markets as the decline is not as large as the market previously expected,” he said. “Fannie Mae is now calling for housing starts in 2023E of 1.4 million, down 9.3 per cent year-over-year. For 2024, Fannie Mae is expecting housing starts to be 1.3 million (down 7.4 per cent year-over-year). Both of the 2023 and 2024 forecasts are much improved from the December 2022 outlook of 1.1 million and 1.2 million, respectively.”
Raising his full-year revenue and earnings projections, Mr. Gillies increased his target for Doman shares by $2 to $9.75. The average is $8.75.
“Doman’s margin profile has had a step change in 2023 which is expected to carry on into future periods. This has meaningfully increased the company’s EBITDA generation potential. In conjunction, the balance sheet is much healthier giving the company more optionality for M&A. Lastly, the company’s ROE and ROCE appear to be structurally improved due to acquisition of Hixson in 2021 and improved working capital management,” he concluded.
Others making changes include:
* Raymond James’ Daryl Swetlishoff to $8.75 from $8 with an “outperform” rating.
“In the wake of better-than-expected U.S. & Canadian housing demand and continued upbeat R&R end-user takeaways supporting improved sales volumes across segments, we highlight Outperform- rated DBM as an attractive low volatile vehicle to play our constructive building materials’ thesis,” said Mr. Swetlishoff. “[Thursday] after market, DBM delivered strong 2Q23 results with EBITDA of $66-million (up 27 per cent year-over-year) well ahead of both the Street and RJL estimates ($49.5-million), with the upside primarily driven by much better-than-expected gross margins coming at 17 per cent. With the modest 45-per-cent payout ratio backstopped by strict working capital management supporting lower net debt (down $59.4-million quarter-over-quarter), we note this bodes well for the healthy 7.6-per-cent dividend yield with DBM looking to execute on additional accretive M&A as valuations return to more attractive levels. Successive EBITDA and margin beats have prompted us to increase our target .... further supported by a ‘lean-and-mean’ business strategy with the application of lower net working capital. With 20-per-cent upside to our new target, despite DBM rallying 10 per cent intraday on the impressive print (vs. the TSX up 1 per cent), we encourage investors add to positions as the company continues to deleverage its balance sheet while guiding to an improved margin range ahead.”
* National Bank’s Zachary Evershed to $8.50 from $7.50 with an “outperform” rating.