National Bank Raises Target Following Monday’s announcement of its intention to increase its planned capital program by approximately $20-million through 2025, Hammond Power Solutions Inc. continues to possess “the financial headroom to continue growing as it sees fit,” according to National Bank Financial analyst Rupert Merer.
“The expansion should be focused in its Monterrey manufacturing capacity, specifically for large custom power transformers,” he said. “These transformers are typically in short supply and are widely used in C&I applications, which should lead to shorter wait times for customers (and better margins for HPS). Given this segment of Hammond’s business was capacity constrained, the added capacity should reduce bottlenecks, and we believe it could add up to $100-million in additional revenue potential (versus its current $900-million pro-forma run rate for 2025E) at a 1-2 timesz build/EBITDA multiple. HPS cites continuing market tailwinds as the main driver of the additional capital investment.
“[The] announcement comes in the midst of the biggest capital plan to date. With Q2 reporting, HPS highlighted that it had invested $28-million to date of a $60-million capex plan from 2023 to 2025E. The additional $20-million just announced follows an $8-million increment with Q1 results and could be a sign of things to come. With highly accretive organic growth opportunities available, we believe that HPS is less likely to acquire production capacity in transformer.”
While Mr. Merer maintained his forecast for the remainder of fiscal 2024, he raised his revenue expectation for 2025 to $852-million from $846-million, leading to adjusted EBITDA of $134.9-million (up from $130.4-million, driven by he calls “strong market demand, evidenced by the additional growth investment.”
“With the additional $20-million of capacity expansion, we are also increasing our revenue estimates for 2026, by which time we believe the company should have a revenue capacity of approximately $1-billion (was $900-million),” he said. “We forecast demand to remain strong into 2026, with a revenue forecast of $959-million (was $892-million), but with more conservative gross margin expectations of 29.5 per cent compared to 31.8 per cent in 2025, driven by an assumption of an industry-wide increase in transformer manufacturing capacity.”
“HPS is in a good position to grow incrementally or in chunks, with $48-million in cash as of Q2, only $13-million in debt, over $50-million per year in FCF (net of growth investments) and a small dividend ($13-million per year). We believe it would be comfortable at $175-200-million in debt (1.5 times EBITDA) which should support organic growth and potential for M&A to expand its power quality product lines.”
Reiterating an “outperform” recommendation for the Guelph, Ont.-based company’s shares, Mr. Merer increased his target to $170 from $164. The current average is $163.
“With more growth coming for HPS, we are raising our target ... which is based on a 15 times EV/EBITDA multiple on 2025E and a long-term DCF with a 9.5-per-cent discount rate,” he said. “HPS currently trades at 9.3 times 2025 estimates vs. more direct transformer peers at 20.8 times and broader electrification peers at 14 times As HPS continues to execute in this high-growth environment and gain exposure, we believe that it should close the valuation gap with peers.”