DIRTT Environmental is a buy, says Paradigm Capital

A disruptor in a market that has grown stale, DIRTT Enviromental (TSX:DRT) is on the cusp of its next leg of growth, says Paradigm Capital analyst Spencer Churchill.

In a research report to clients this morning, Churchill initiated coverage of DIRTT with a “Buy” rating and $4.50 one-year target, implying a 50% return at the time of publication.

Churchill says DIRTT, which is now nearly a decade old, is approaching a “tipping point of market acceptance”. He says the company has built an impressive client base, but will see its top and bottom lines expand as its organic growth will be complemented by more international sales and distribution partners and from deeper penetration into verticals such as healthcare.

Founded in 2004, Calgary-based DIRTT, an acronym for ”Doing It Right This Time”, employs a 3D software platform to design and produce custom prefab interiors. The company compares its product to Lego in that its components connect using a repeated interface, but produce a unique result. DIRTT IPO’d in November of last year after raising $45-million through a syndicate of underwriters that was led by Raymond James and included Canaccord Genuity, National Bank Financial, TD and Cormark.

The Paradigm analyst says the interiors DIRTT designs match the look and feel of a high-end custom solution at a fraction of the cost, and its technology focused approach enables it to tackle jobs that are downmarket from its competitors. The company’s average installation cost, he notes, is $70,000, far below the $1-million and above average of many of its comparables. The company’s ICE platform is its key advantage, says Churchill, who points out that the $32-million the company has invested in ICE, which automates a product’s design, engineering and delivery, is protected by 78 patents, with another 124 applications pending.

Churchill believes DIRTT will post EBITDA of $14.9 million on revenue of $167.5-million in fiscal 2014, a topline that would be a 20% bump over last year’s $139.79-million revenue number. He expects this growth will accelerate slightly the following year, when he is forecasting EBITDA of $30.18-million on revenue of $203.14-million.