Versant’s Lindsell Upgrades Target Price on ZCL Composites

ZCL Composites (TSX:ZCL) reported its fiscal 2011 results Thursday. Revenue was up 5% to $127-million, and the company returned to profit, earning $3.5 million, or twelve cents a share, compared to a loss of $16.7 million, or $.59 cents a share in 2010.

Versant Partners analyst Neil Lindsell was encouraged by the numbers, and says he continues “…to be confident of a return to solid growth this year.” In a research note yesterday, Lindsell maintained his BUY recommendation on ZCL, but increased his twelve-month target slightly, from $4.25 to $4.50.

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2010 was a rare misstep for the normally profitable ZCL. CEO Rod Graham described the year as disappointing, pointing to the difficult integration of Montreal’s Dualam Plastics. Although Dualam contributed $14.7 million in additional revenues for ZCL’s corrosion business, it was saddled with significant losses. But in the fourth quarter of 2011, ZCL’s AboveGround Fluid Containment Division finally rebounded, posting a 40% gain over the same period a year earlier, mainly on the back of a $3.2 million increase in revenue from Dualam.

Founded in 1987, Edmonton-based ZCL is North America’s largest manufacturer of environmentally friendly fibreglass reinforced plastic underground storage tanks. The company also provides anti-corrosive piping, lining systems, and other accessories. ZCL has six plants in Canada, six in the US and one in The Netherlands. The company, which had been structured as three business units, Petroleum Products, Water Products and Industrial Corrosion Products, recently simplified its divisions into Underground Fluid Containment and AboveGround Fluid Containment.

Lindell notes a number of things that suggest ZCL is returning to form. He points out that the company will reinstate its $0.01 cent per quarter dividend, and will review it regularly for an increase. He also notes the company’s order backlog has grown to over $50 million, a record. And with ZCL now once again profitable, it has begun to pay down its debt. These things influenced the reasoning behind Lindsell’s upgrade, as he feels they provide evidence the company should be valued with a “more conventional valuation metric such as EV/EBITDA.” Lindsell $4.50 target is based on eight times his 2013 estimate of EV/EBITDA.

Shares of ZCL Composites closed Friday up .3% to $3.26.

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