Citi analyst Paul Lejuez said he came away from Gildan Activewear Inc.’s Investor Day event on Tuesday “even more positive” on its prospects.
“While there were no big surprises, management laid out their plan for long-term topline growth driven by manufacturing capacity expansion and market share gains,” he said. “GIL is in a unique position to add capacity over the next 3 years (capex planned at $600-900-million over the next 3 yrs vs the last 3 yrs at $300-million ). Management (and we) expect increased capacity to drive topline growth as the N. American economy reopens and they drive further market share gains (helped by its EDLP positioning). And with many companies looking to near-shore production as a secular trend, GIL’s Central American based operations gives them a proximity advantage versus Asian supply chains. With topline expected to grow 7-10 per cent annually at an 18-20-per-cent EBIT margin, this is an extremely attractive algorithm within the retail landscape.”
Mr. Lejuez thinks the Montreal-based clothing manufacturer’s expectation to increase sales to US$3.6-$3.9-billion by 2024 from US$2.9-billion in fiscal 2021 is “fairly conservative.” He expects the expansion of its Central America facilities and opening of its first production line in its Bangladesh facility by the first quarter of 2023 could push sales of $3.8-billion without price increases.
“GIL’s 2024 outlook of sales between $3.6-3.9-billion and operating margin of 18-20-per-cent implies EPS of $3.30-$4.00 in 2024 vs consensus of $4.00,” he said. “Ultimately we believe this long-term outlook will prove conservative. Our F24 estimate is $4.16.”
Maintaining a “buy” recommendation for Gildan shares, Mr. Lejuez raised his target to US$50 from US$48. The current average is US$50.24.
“Our 2024 outlook has sales growing to $4.1-billion, which we believe remains realistic considering the amount of capacity that GIL is expected to have come online over the coming years,” he said. “We increased our capex expectations which we believe will drive incremental sales beyond 2024 above our previous expectations. As a result, the net of higher capex and higher sales beyond 2024, drives our TP.”
“The company has made several strategic decisions that position them well over the next several years (even beyond F22) to further take market share in the markets they play in. We believe this potential is not yet fully reflected in consensus numbers,”
Elsewhere, National Bank’s Vishal Shreedhar cut his target by $1 to $64.
“GIL’s valuation is attractive as shares are currently trading at 13.8 times NTM [next 12-month] EPS vs. the five-year average of 18.3 times,” said Mr. Shreedhar. “That said, we acknowledge that commodity risk (cotton prices) and worries regarding an economic slowdown are tapering investor enthusiasm (particularly when coupled with GIL’s growth ambitions supported by heightened capex).”