CIBCEQUITY RESEARCH
May 10, 2023 Earnings Update
AIRBOSS OF AMERICA CORP.
Q1 Results Suggest Downside To Current Equity Value Is
Limited
Our Conclusion
On the back of BOS’s Q1 results, we continue to view the downside from
current levels as limited while we remain optimistic BOS will successfully
execute against its deep pipeline of opportunities over time. We maintain our
Outperformer rating, and our price target goes from C$16 to C$15 as we
tweak our model and adjust our FX assumptions.
Key Points
BOS reported Q1 results that provide us a greater sense of what its floor
EBITDA is in a soft landing environment. The company reported Q1 EBITDA
of $10MM and we see BOS as capable of holding these levels when
considering the following:
- BOS noted the volumes within ARS have shown improving monthly
trends since exiting 2022 (i.e., January better than December, February
better than January and so on), which suggests the company is
recovering from the lows it saw late last year.
- The company successfully addressed its problem contracts within AEP
and so we view the Q1 results as a new normal for this segment. AEP
has now turned the corner and should be structurally profitable looking
ahead. As BOS continues to diversify AEP’s end-market exposure more
towards non-auto, the company has indicated the ability for this segment
to generate margins similar to ARS (i.e., gross margins in the mid- to
high-teen percentages).
- While there has been disappointment that ADG has not been able to
secure another large contract, we note these opportunities have not been
awarded to a competitor and remain available for BOS. The timing of
these awards has become less certain. The company noted its base
revenue for ADG is $20MM-$25MM per quarter, with any new contract
wins providing upside. For context, ADG reported Q1 revenue of $27MM,
so it is tracking just a touch above the base revenue level. ADG did
announce a number of contract wins in Q4 (Husky, medical test kits), so
it will benefit from a higher run-rate in 2023.
If we annualize BOS’s Q1 EBITDA, this infers a floor level of ~$40MM. If we
look at its pre-pandemic EV to forward EBITDA trading range, it troughed at
~5x. This implies an enterprise value of $200MM. BOS’s current net debt is
$122MM, but at its floor EBITDA level, we think it can deleverage by another
~$40MM by the end of 2024. Applying this pro forma net debt gets us an
implied equity value of ~C$6/share, which is close to where the company is
trading today. We argue that BOS is currently trading at close to trough
valuation against trough earnings. In other words, at its current equity value,
very little credit is being given to BOS that it can convert its backlog.