AirBoss of America Corp ABSSF

TD

[retiredcf]

Have an $11.50 target. GLTA

AirBoss of America Corp.

(BOS-T) C$7.10

Q1/23 Preview Event

AirBoss is reporting Q1/23 after market close on May 9, 2023. We forecast Q1/23 Adjusted EBITDA of $10.1 million vs. consensus of $10.4 million.

Impact: NEUTRAL

We are maintaining our SPECULATIVE BUY recommendation and C$11.50 target. We have updated our economic, currency, rubber, and interest rate assumptions, along with other minor modelling updates, the net impact of which is immaterial to our forecasts. We forecast a 49% y/y decline in Q1/23 Adjusted EBITDA, in-line with the 49% decline reported in Q4/22, and driven primarily by lower Defense (ADG) EBITDA, partially offset by improving AEP EBITDA as a result of new pricing on renegotiated contracts with key customers. We believe that economic headwinds could lead to y/y declines in tolling and non-tolling volumes in ARS. Our forecast for a decline in ADG is largely due to the absence of replacement revenue for the completed nitrile glove contract in 2022.

Our best estimate of the credit agreement covenants suggests that the risk of the company exceeding the covenant was dramatically reduced in Q4/22. However, we believe that several quarters of positive momentum are needed to provide the market with confidence that balance sheet risk has been reduced to prudent levels. We believe that improving results at AEP, declining net debt to Adjusted EBITDA, and/ or an improved outlook for ADG orders could be the required catalysts for the stock.

A lack of new orders 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.