Since National Bank Financial analyst Rupert Merer initiated coverage of Hammond Power Solutions Inc. on April 9, its shares have dropped almost 14 per cent, however he continues to see a “long runway for growth” and thinks the Guelph, Ont.-based manufacturing company should “be favoured as a good way for investors to play re-shoring, electrification and accelerating data centre demand.”
Accordingly, following the release of in-line quarterly results and in response to the share price depreciation, he raised his recommendation to “outperform” from “sector perform” previously.
After the bell on Monday, Hammond reported first-quarter revenue of $191-million, up 11 per cent year-over-year and above both Mr. Merer’s $190-million estimate and the consensus projection of $188-million as it “continues to benefit from market tailwinds. Adjusted EBITDA of $31.0-million was narrowly lower than the analyst’s $31.8-million forecast but topped the Street’s expectation of $30-million.
“Growth should continue through 2024, but could slow as HPS is somewhat capacity constrained until it completes expansion investments,” said Mr. Merer.
“HPS previously announced production investments to take it to $900-million of revenue capacity by year-end (from $800-million now). With Q1 results, HPS highlighted strong demand driving small incremental plans for further equipment spending and its first price increase since 2022. The price increase should take hold in Q2E and support margins. To keep up with market growth at over 10 per cent per annum beyond 2025, we believe that HPS needs to invest about $40-million to $50-million per year. We will look for more colour on its growth plans, with a positive view on additional investments.”
Mr. Merer thinks Hammond currently sits in a favourable position to grow, pointing to a “strong” balance sheet, over $50-million per year in free cash flow and a “small” dividend obligation ($13-million per year).
“We believe it is comfortable at up to about $175-million in debt (less than 1.5 times EBITDA) which should support organic growth and potential for M&A to expand its power quality product lines,” he said.
The analyst maintained his target of $164 for Hammond shares. The average on the Street is $140.50.