CIBCEQUITY RESEARCH
March 9, 2022 Earnings Update
AIRBOSS OF AMERICA CORP.
Macro Backdrop Remains Positive
Our Conclusion
While BOS refrained from providing official guidance on its Q4 earning call
until it has more clarity on recent bidding activity, the company reiterated its >$1.5B of opportunities in the pipeline. This pipeline does not include
opportunities that the company is not currently bidding on but knows is
forthcoming. For example, the pipeline does not include the U.S. low burden gas mask contract or the roll-out of the B3 blast gauge. The company also noted that a significant portion of the >$1.5B pipeline should come in the next three to six months. Net-net, we maintain our positive view on the company as it benefits from a favourable macro backdrop given its exposure to the defense and healthcare industry. We maintain our Outperformer rating and C$55 price target.
Key Points
Defense Spending Set To Increase: With the recent Russia/Ukraine conflict, NATO countries have pointed to increasing defense spending (getting to the 2% GDP threshold). Germany recently announced allocating $100B of its 2022 budget to military investment, up sharpy from $47B in 2021. Both France and Canada, while not providing firm numbers, have pointed to increasing military spending in the wake of the Russia/Ukraine conflict. Looking at defense spending as a % of GDP across the NATO countries, the majority of them remain below the 2% threshold and we suspect there will be growing pressure for countries to catch up given the recent developments. We believe this upward momentum in shoring up defense budgets will create a tailwind for AirBoss Defense Group’s military protective equipment. The company noted recently that it has been seeing more interest in its defense
products such as boots, gloves and masks. We also see BOS in a strong
position as the U.S. government puts out to bid its low burden gas mask and overpressure sensor contracts. As it relates to these two opportunities, we see BOS as having the most capable technology in the market today.
Medical Stockpiles Still Need To Be Replenished: While hopes are that
we are moving past the worst from COVID-19 as more countries transition
towards treating this virus as an endemic, this does not alleviate the need for medical PPE given the depletion of stockpiles. BOS is currently bidding on the U.S. surgical gown contract as it was shortlisted as one of three vendors back in November 2021 with the U.S. government expecting production will be divided amongst two or more contractors. The company continues to deliver the rest of the HHS nitrile glove contract with expectations that HHS will continue to purchase more gloves as they build up their stockpile. There also remains a strong demand for masks and the recently launched AirBoss 100 half mask fits the needs of healthcare and front-line workers. The product is designed to provide filtered particulate protection from chem-bio agents and contaminants at 99.97% (vs. the N95 masks at 95%) and received NIOSH approval back in October 2021. Given the need to rebuild stockpiles, with a greater focus from governments to be prepared for the next bio-threat, this is a positive demand driver for ADG