Nat Bank Fin : Marketing HighlightsTransforming in high-growth markets
High growth potential with minimal investment
HPS plans to invest ~$30 mln in production capacity in Canada and Mexico over the next two years. This should take its capacity to more than $1 bln/yr (up from $800 mln/yr), with investments at about a 1x capex/EBITDA multiple (assuming it sells out on capacity). This supports HPS' growth targets for the next couple of years and should help to maintain its market position.
Margins are elevated and could see continued support
HPS has grown its gross margins to 32% from ~25% a few years ago. Some of this came from operating leverage (with volumes up >10% pa), some from shifting to higher margin products and services (in power quality and in India), and some from its pricing power. With capacity additions by some of its competitors and uncertainty in the market, HPS could see margin pressures. However, we believe it has a competitive position in its distribution channels, backed by a broad product line, scale and mass customization abilities.
M&A could make sense, if HPS can find the right deal
The market for power quality products is highly fragmented, but could grow quickly with EV chargers and other power-intensive technologies. HPS has demonstrated its ability to leverage its distribution network to increase sales on the power quality products it acquired with Mesta three years ago and could do this again (if it can find the right deal).
Liquidity position complementing tailwinds
HPS is well-positioned for both steady and significant growth, with $48 mln in cash as of Q2, just $13 mln in debt, and over $50 mln in free cash flow annually (after growth investments). It pays a modest dividend of $13 mln per year. We believe it could comfortably handle $175-200 mln in debt (around 1.5x EBITDA), which would support organic growth and provide opportunities for M&A to expand its power quality product lines.
Maintain rating & target; HPS could be worth more
We model revenue growth at 10%/yr and 300 bps of margin compression to '26E. We maintain our $170/sh target, based on a DCF with a 9.5% discount rate and equal to 15x EV/EBITDA multiple on our '25E (peers trade at >16x on FY1). We believe that HPS is well positioned in its target markets and should see tailwinds for its transformer and power quality products for years to come.