AirBoss of America Corp.
(BOS-T) C$7.51
Engineered Products Rebounds; B/S Risk Declines Significantly Event
AirBoss reported Q4/22 results on March 9 and released its full financial statements last week. Airboss reported Adjusted EBITDA of $13.9 million, compared with our forecast/consensus of $6.0 million/$5.7 million. Adjusted diluted EPS of $0.45 compared with our forecast/consensus of -$0.04/-$0.04.
Impact: NEGATIVE
We are lowering our target price to C$11.50 from C$14.00 and maintaining our SPECULATIVE BUY rating. The decrease in our target price is primarily due to the carry-forward of a portion of the lower-than-expected Rubber Solutions (ARS) and Defense (ADG) EBITDA, partially offset by updated EBITDA multiples to reflect current ADG comparable valuations and our view of the reduced risk related to financial covenants.
AirBoss reported stronger-than-expected Q4/22 Adjusted EBITDA due to Engineered Products (AEP) segment results which benefited from product mix, pricing, and renegotiated AEP contracts. However, ADG and ARS revenue and margins were weaker than forecast. The company anticipates that 2023 AEP segment revenue will return to levels approximately equal to 2019 ($125 million), while gross margin will improve to 'low double digits'. We are now forecasting revenue of $121 million and margin of 11.7% for the segment in 2023.
Our view of the opportunities for earnings growth and risks in AirBoss continues to evolve. It appears that AEP profitability has taken a significant step higher and is a key contributor to lower financial covenant risk. However, a lack of new orders and ongoing uncertainty for ADG, combined with economic headwinds for ARS, are the reasons for continuing caution in determining target valuation multiples. Although our target price and recommendation have clearly been missing the mark in recent quarters, we believe that a forward-looking view that considers the much lower share price, dividend, and strong franchise value in the base business supports our expectation of upside over the next 12 months.
TD Investment Conclusion
For investors who can tolerate volatility and short-term uncertainty, we believe AirBoss could provide significant upside over a 12-month investment horizon. Our target price takes into account the earnings potential from the base business and our view of its franchise strength, which we believe the current valuation fails to reflect.