National Bank eeing a “compelling valuation with upside potential,” National Bank Financial analyst Ahmed Abdullah assumed coverage of AirBoss of America Corp. with an “outperform” rating on Friday.
The Toronto-based chemical and manufacturing company previously had an “under review” designation from the firm.
The analyst sees the AirBoss Defense Group as “an expanding survivability platform with significant upside potential” and its Airboss Rubber Solutions business as an “industry-leading” compounder.
“The AirBoss Defense Group (ADG) provides military, law enforcement, healthcare providers, industrial providers, and first responders with a diverse portfolio of protective equipment aimed towards survivability,” he said. “The segment’s results have normalized in 2022 following a material jump in 2020 and 2021 due to four large contracts in that period. ADG will likely continue the expansion of its innovative survivability platform with steadier growth ahead as its baseline business secures longer-term mandates.”
“AirBoss Rubber Solutions (ARS) is North America’s second largest custom compounder which manufactures 2,000+ proprietary custom formulations and compounds from both natural and synthetic polymers, reinforcing agents, and other additives/chemicals. ARS caters to a wide array of customers (more than 90 per cent of sales in North America) in addition to supplying the Company’s other two segments with compounded rubber and meeting their material R&D needs. We expect ARS to deliver solid gains with margin expansion driven by the growth of specialized compounded products (white/colour compounds and other).”
Moving forward, the analyst thinks a turnaround in its AirBoss Engineered Products (AEP) segment will “enhance the company’s profitability profile.”
“AEP is a leader in manufacturing and supplying customized rubber-based products that primarily include anti-vibration and noise dampening solutions,” he said. “Customers of the segment are mostly in the North American automotive and adjacent sectors (including electric vehicles, heavy truck, and off-highway sectors), with a recent push into non-automotive markets. AEP recently secured amended contract terms with its top customers to reverse a trend of operating losses that has taken hold since 2020. Furthermore, AEP’s push into the non-automotive market is in its early stage and could present an opportunity to enhance margins and provide another growth vector.”
Believing AirBoss’s current levels “present a value opportunity for investors, and that is before considering upside potential from the ADG potential sales pipeline, Mr. Abdullah set a target of $12 for the company’s shares. The current average on the Street is $12.92.
“Our $12 target for AirBoss of America is based on the average of the 2023 value in our Discounted Cash Flow (DCF) and the 2024E metric in our Net Asset Value (NAV) analysis for implied EV/EBITDA multiples of 8.0 times 2023 and 7.3 times 2024 estimates, in line with the current peer group average at 8.4 times 2023 and 7.3 times 2024,” he said.
“AirBoss is a unique industry player that can leverage its core competency to take advantage of various growth opportunities in different vectors (defense, nonautomotive, etc.). We believe BOS warrants trading at these implied multiples as we expect the Company to continue the expansion of its innovative survivability platform at ADG with a degree of stability to come, deliver steady growth at its ARS business with margin expansion driven by the growth of specialized compounded products, and reverse the trend of operating losses at AEP with amended customer agreements in place while driving top-line growth across its product lines (non-automotive included).”