CIBC ReportEQUITY RESEARCH
November 10, 2021 Earnings Update
AIRBOSS OF AMERICA CORP.
Continue To See A Path Towards Higher Margins
Our Conclusion
On the back of BOS’s Q3 results, our thesis is unchanged. With the company reaffirming its 2021 guidance, it sets BOS up for a record Q4. Despite the inflationary pressures facing BOS today, the company continues to benefit from a robust pipeline of organic and inorganic growth opportunities, past investments in innovation and capacity, and margin improvement initiatives. We continue to see this as a company with structurally higher earnings versus pre-pandemic levels. We maintain our Outperformer rating. Our price target moves down C$1 to C$54 to reflect changes in our pro forma net debt.
Key Points
Good Long-term Momentum In ARS Positions It For Structurally Higher Margins: ARS is currently running at ~70% of upsized capacity, which is up from ~60% in 2017 before the transformation of ARS. This includes about two-thirds utilization of the new color line and about one-third utilization of the specialty compounding line. While ARS has seen margin pressures in the quarter due to labor, freight, and commodity pricing challenges, its contracts have the ability to pass along the latter two inflation cost pressures to customers subject to a timing lag. That said, BOS essentially views the current margin pressure as being transient and it will be able to capture higher pricing to return margins back to historical levels. First, given ARS has latent capacity, this puts BOS in a favorable position given the broad supply
chain issues impacting the rubber compounding industry. Second, the growth in colored and specialty rubber compound revenue has a positive mix impact on profitability. Third, the company remains active on M&A, evidenced by the recent acquisition of ACE. The acquisition of ACE expands ARS’s reach into the U.S. South and Midwest with minimal overlap in customer base. As well, Ace’s color and specialty compound capacity doubles ARS’s current color compound capacity, and so the combination will nearly triple the company’s color rubber compound capacity. We estimate specialty/color rubber compound EBITDA margins are north of 20% versus black rubber margins in
the mid-teen percentage range.
AEP – Auto Supply Chain Issues Have Not Derailed The Restructuring Plan: AEP faces pressure from higher raw material and labor costs coupled with supply chain disruptions impacting the auto sector. However, the company continues to push forward with its initiatives to improve the operations at AEP. In Q3, the segment installed a new molding platform (replacing a 20-year-old platform) in an effort to drive automation and efficiency. The second fully robotic working cell that will reduce labor costs will be installed in Q4. BOS expects to complete the modernization of AEP by year-end, which will allow AEP to both increase the capability to produce higher-margin products and lower operating expenses. On the other hand, BOS continues to renegotiate unfavorable contracts. There remains 25%-
30% of customers that have thus far resisted renegotiating their contract. To the extent BOS is unsuccessful in re-pricing these agreements, it does have line of sight as to when they roll over as the majority of them expire in 2023.