M Partners analyst Steven Kraft expects the valuation gap between Baylin Technologies (TSX:BYL) and its peers will close as the company continues to outperform.
In a research report to clients Thursday, Kraft initiated coverage of Baylin with a BUY rating and a one-year target price of $12.50, implying a return of 73.9% from the closing price on January 30th.
Kraft notes that Baylin currently trades at 5.0x 2015 EV/EBITDA while its peers trade at 8.1x. But the M Partners analyst expects Baylin to grow at a Compound Annual Growth Rate of 28% from 2013 to 2015, more than doubling the 11% expected growth of a peer group that includes Canadian companies such as EXFO and Redline Communications. For this reason, Kraft says Baylin deserves an EV/EBITDA premium of 10x, which is the number he applies to his fiscal 2015 projections to arrive at his target price.
Founded in 1978, Baylin Technologies has decades experience in designing, producing and supplying antennas. The company says its growth is being paced by the rapid growth of mobile devices, which has resulted in a need for increasingly complex, innovative and highly engineered antennas. The company’s customers include Motorola, Nokia and Vodafone. Baylin began trading November 27th after raising $50-million by selling 6.25-million shares at $8.00.
Kraft points out that industry trends are clearly supporting Baylin’s positioning. He notes that Cisco is predicting that mobile data traffic will increase 13-fold between 2012 and 2017 and Ericsson believes it will grow 10-fold between 2013 and 2019.
The M Partners analyst says antennas are the most essential component of mobile and wireless products because the enable core functionality and allow devices to transmit data over networks. The very first cell phones, says Kraft, had just one antenna to enable analog voice calls, but current smartphones now average seven antennas to accommodate the range of tasks they can tackle.
At press time, share of Bayline Technologies were down .8% to $7.13.