Firan Technology is still a buy despite mixed Q2, Paradigm Capital says

A weaker than expected second quarter isn’t shaking Paradigm Capital analyst Daniel Kim’s confidence in the long-term prospects of Firan Technology Group (Firan Technology Group Stock Quote, Chart, News: TSX:FTG).

On Monday, Firan reported its Q2, 2017 results. The company earned $105,000 on revenue of $25.5-million, a topline that was up 29 per cent over the same period last year.

“The second quarter of 2017 saw continued growth in FTG from last year’s acquisitions and progress in transitioning the work into FTG’s legacy facilities,” said CEO Bradley Bourne. “We continue to achieve the sales growth expectations from the acquisitions but did incur increased costs in the quarter related to the transition due to the extended use of the Hudson facility as well as ramp-up costs in Chatsworth. We remain focused on completing all transition tasks to support customer demands and ultimately generating the anticipated returns from the acquisitions.”

Kim says some one-time expenses made this quarter appear worse than it might have been.

“This facility shutdown obviously created more disruption than we accounted for, both in top-line results and one-time costs (transition costs plus hiring of numerous temporary workers to satisfy demand),” the analyst says. “We see all of this as transitory and believe H2 will see the company’s profits break out, owing to strong customer demand and lower costs. Some 90% of PCT’s $3M fiscal Q2 costs (incl. everything except material) will not be repeated in Q3.”

But Kim says investors who buy Firan now will be rewarded later.

“The sell-off is an overreaction to a transition quarter and we believe investors will be handsomely rewarded owning this stock through the second half of this year,” he says.

In a research update to clients today, Kim maintained his “Buy” rating and one-year price target of $5.75 on Firan Technology Group, implying a return of 35 per cent at the time of publication, including dividend.

Kim thinks Firan will post Adjusted EBITDA of $11.3-million on revenue of $104.5-million in fiscal 2017. He expects those numbers will improve to EBITDA of $19.0-million on a topline of $115.5-million the following year.