Baylin Technologies’ second quarter was no fluke, says Paradigm

Paradigm Capital analyst Daniel Kim says Baylin Technologies’ (Baylin Technologies Stock Quote, Chart, News: TSX:BYL) second quarter results bested his expectations across the board.

On Tuesday, Baylin reported its Q2, 2016 results. The company lost (U.S.) $311,000 on revenue of $15.7-million, a 57 per cent increase over the same period last year.

“We are very pleased to report another positive EBITDA quarter in this second quarter of 2016. By showing an increase from last quarter, we are encouraged by the improved underlying financial metrics,” said CEO Randy Dewey. “The changes we’ve made to the business over the past five quarters is leading to the improving gross profit and gross margin percentage, and operating expense control. As noted in our comments in the last quarter, we are encouraged by the strong start to the year; however, the management team is continuing its efforts to increase profitability and cash flow. Our primary focus remains unchanged: controlling operating expenses, improving margins, as well as building a stronger sales culture to achieve growth across all three of our product lines and diversifying our customer base.”

Kim says every key financial metric from Baylin’s second quarter was an upside surprise, including stronger revenue, higher margin and lower costs. It’s a trend he thinks the company can continue.

“Improved cost controls (reduced opex, manufacturing efficiency and product line rationalization), improved gross margins, investment in key products and new customer wins have created the conditions for sustained profitability, in our opinion,” says the analyst. “In addition, we commend BYL for it prudent cash management. Cash grew to $8.1M ($5.4M net) from $6.8M ($3.7M net) reported last quarter. The company has a $6.9M credit facility, of which $2.7M has been utilized. While management anticipates the company will consume cash in H2 to fund working capital, it will have more than sufficient liquidity to fund this growth. While cash flow from operations was near breakeven in the quarter, the biggest delta was the company’s astute sale and leaseback of its Israel R&D facility for $1.9M. BYL’s restructuring (cost reduction and renewed growth) is nothing short of remarkable, yet the market has not awarded its efforts. Therein lies the opportunity.”

In a research update to clients today, Kim maintained his “Buy” rating and one-year price target of $5.00 on Baylin Technologies, implying a return of 138 per cent at the time of publication.

Kim thinks Baylin will generate EBITDA of $1.3-million on revenue of $60.5-million in fiscal 2016, figures he expects will rise to $4.3-million in EBITDA on $67.5-million the following year.