The market is rightly beginning to value DIRTT Environmental Solutions (TSX:DRT) as a tech company, not a manufacturing play, says Laurentian Bank Securities analyst Michael Glen.
In a research update to clients today Glen maintained his “Buy” rating, but raised his one year target price on DIRTT from $8.00 to $10.00, implying a return of 32% at the time of publication.
Glen points out that in his coverage initiation report from September of last year he said he felt DIRTT deserved a premium valuation because the company is a technology driven manufacturer. The analyst said that if the market decided to value the company as such, it would justify an EBITDA multiple expansion into the mid-teens.
That, says Glen, is what appears to be happening.
The Laurentian analyst explains that he thinks DIRTT is in the early stages of its growth and its comparables must now include peers higher up the value chain than office furniture and building product companies. His new target price, explains Glen, is derived from applying an EBITDA multiple of 15x to DIRTT’s 2016 EBITDA, up from a 12x valuation.
“The market is now clearly valuing DIRTT more as a technology play versus a manufacturing story, and this has resulted in us having to adjust our comparables group to include software peers,” says Glen. “DRT is currently trading at ~30x LTM adjusted EBITDA, a multiple which is clearly indicative of strong investor conviction underlying the long-term growth profile for the business.”