Revised Targets Following “another solid quarter despite very difficult operating conditions,” Desjardins Securities analyst Benoit Poirier reaffirmed his bullish stance on Hroux-Devtek Inc., seeing its “operational track record intact.”
“While these issues are expected to persist in the mid-term, management’s strong operational track record gives us confidence in its ability to navigate through this challenging environment while unlocking value for shareholders,” he said. “We reiterate our Top Pick rating for HRX, the only stock rated as such in our coverage.”
On Thursday before the bell, the Longueuil, Que.-based manufacturer of aerospace products reported revenue of $148-million, down 4.9 per cent year-over-year but above both Mr. Poirier’s $146-million estimate and the consensus forecast of $140-million. Adjusted earnings per share also slipped 5 per cent to 27 cents, missing the analyst’s projection by 2 cents.
Mr. Poirier continues to see a rise government spending as a catalyst for its Defence segment and thinks its Commercial business will see an uptick as Boeing Co. increases production of its 777-freighter model jets, which it provides the landing gear for.
“HRX currently trades at an EV/FY2 EBITDA of 6.5 times or at an eye-opening discount of 3.4 times vs its U.S. peers despite having a stronger balance sheet and healthy FCF generation capabilities,” he said. “We believe HRX’s greater exposure to the defence segment, solid operational reputation and experienced management team ideally position the company for the recovery. We believe share buybacks are the right tool to unlock shareholder value while maintaining a healthy balance sheet to seize M&A opportunities as they arise.”
After raising his 2023 adjusted earnings per share projection (to $1.07 from $1.01), Mr. Poirier increased his target for Hroux-Devtek to $27 to $25. The average is $23.73.
“With encouraging signs that the air travel recovery is on its way, we believe HRX offers a compelling value proposition, with an attractive valuation and a healthy balance sheet to opportunistically unlock inorganic growth opportunities,” he added.
Elsewhere, National Bank Financial’s Cameron Doerksen trimmed his target by $1 to $25 with an “outperform” rating.
“The outlook for revenue and bottom line growth in both F2023 and F2024 remains positive, in our view,” said Mr. Doerksen. “This year, HRX will benefit from a sight increase in the Boeing 777 widebody production rate, the ramp-up of a new commercial actuation contract for Boeing, as well as increased revenue from several defence programs. HRX’s strong free cash flow and low leverage (1.8 times) will also support potential M&A.”
Scotia’s Konark Gupta to $21 from $24 with a “sector outperform” rating.
“HRX reported good FQ4 results, considering COVID-19 challenges in January and ongoing supply chain disruptions,” said Mr. Gupta. “After a significant FQ3 miss, revenue and EBITDA beat expectations, driven by defence as aftermarket sales rebounded and various contracts continued to ramp up. We believe revenue will finally rebound effective this quarter, after declining over two years, as 777/777X production rate increases (despite delays), defence contracts further ramp up, more contracts begin to contribute, and aftermarket demand remains strong. However, management sounded cautiously optimistic due to supply chain challenges, which causes us to trim our expectations.”