today's globe and mail Cannacord $53 After its first-quarter results “significantly” exceeded his expectations, Canaccord Genuity analyst Matthew Lee hiked his 2023 and 2024 financial forecast for Hammond Power Solutions Inc. (
), expecting “electrification tailwinds will persist over the medium term.”
The Guelph, Ont.-based manufacturer of transformers used in electrical equipment and systems reported revenue of $171.1-million, up 33.9 per cent year-over-year and well above Mr. Lee’s $146.6-million estimate and the consensus forecast of $152.4-million driven by higher sales through its U.S. distribution channel. EBITDA jumped 67 per cent to $24.1-million, also topping estimates ($18.2-million and $19-million, respectively), while earnings per share rose to $1.32 from 72 cents a year ago (versus projections of 91 cents and 92 cents(.
“Revenue in the U.S. and Mexico contributed to the beat, driven by the expanding U.S. distribution network and a favourable foreign exchange impact,” said Mr. Lee. “Even after adjusting for one-time items and foreign exchange benefits, revenue of $155-million was still above our $147-million. Volume increased by 9 per cent year-over-year excluding the deferred India shipment, which was much greater than the historical average of 3-5 per cent and suggests strong underlying demand.”
The analyst thinks Hammond’s backlog expansion points to a “robust” sales trajectory for 2023
“We were especially impressed by the 6-per-cent quarter-over-quarter backlog growth in Q1, following 13 per cent in Q4 and 15 per cent in Q3,” he said. “Despite the slowdown, we believe backlog expansion was entirely volume related, which highlights elevated order demand even in an uncertain economic environment. Management commented that the order book for the rest of 2023 is already filled and that customers have not pushed back on pricing, giving substantial visibility for the firm’s revenue trajectory into F24. We believe the volume-driven backlog will sustain our 19.8-per-cent fiscal 2023 estimated revenue growth (from 10.6 per cent) and 4.4 per cent in F24E (from 5.2 per cent).
“Additional production capacity should boost revenue but impact margins. Hammond noted that most of its factories are currently operating at full or near-full capacity, which drives higher operating margins. Last quarter, HPS announced its plan to invest $40-million in capex in F23 and F24, which management estimates will produce $250-million in additional revenue capacity over the next five years. While new machinery should alleviate some of the current capacity constraints, the expansion will likely lead to some margin dilution and added opex. We estimate that gross margins will come down from 32 per cent in Q1 to 28.5 [er cent in Q2 and stay in the 28-29-per-cent range for F23.”
Also seeing further upside potential for its U.S. distribution network and expecting a dividend increase in the next few quarters, Mr. Lee thinks Hammond’s valuation “remains attractive given growth, balance sheet, and cash flow,” prompting him to hike his target for its shares to $53 from $41.50 with a “buy” rating. The average is $48.83.
“On our revised estimates, Hammond trades at 5.6 times EV/F23 EBITDA, which we believe is still very attractive given that larger peers trade at 14 times,” he said. “We also increased our target multiple to 6.5 times (from 5.5 times) F24E EBITDA to account for the significant growth opportunities ahead, which leads us to raise our target price.”