AirBoss of America Corp ABSSF

TD

[retiredcf]

Their target is only $10.00 which is well below the Street concensus of about $15.00. GLTA

AirBoss of America Corp.

(BOS-T) C$7.44

Q1/23; AEP Recovery Limits Earnings Downside Event

AirBoss reported Q1/23 Adjusted EBITDA of $10.3 million compared to our forecast/ consensus of $10.1 million/$10.3 million. Adjusted diluted EPS of $0.06 compared to our forecast/consensus of $0.06/$0.09.

Impact: SLIGHTLY NEGATIVE

We are lowering our target to C$10.50 from C$11.50 and maintaining our SPECULATIVE BUY rating. The decrease in our target is primarily due to lower ARS and ADG forecast EBITDA, partially offset by higher AEP forecasts and lower forecast net debt. Our updated estimates reflect the stronger-than-expected AEP revenue and ADG earnings, and the carryforward of lower-than-forecast ARS margin. While we have increased our 2023 ADG EBITDA forecast as a result of its Q1/23 margin, due to a lack of new orders, we have further risk adjusted our forecast beyond 2023 resulting in a bias lower to ADG and consolidated estimates.

AirBoss reported mixed Q1/23 results, with FCF, and ADG and AEP gross margins higher-than-forecast, while ARS gross margin did not meet our expectations. We believe that Q1/23 AEP revenue and gross margin was biased higher due to one- time benefits resulting from renegotiated contracts. We estimate that AEP gross margin will normalize to a range of 12-14% by H2/23. This aligns with management's past indications for 'low double-digit' AEP gross margin. We believe that the balance sheet risk has been reduced materially, though we anticipate that several quarters of positive momentum are needed to provide the market with confidence that balance sheet risk has been reduced to prudent levels.

A lack of new orders for ADG, combined with economic headwinds for ARS, are the reasons for continuing caution in determining target valuation multiples. 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.