Baylin Technologies still has double-digit upside, Paradigm Capital says

The stock has risen sharply since last autumn, but Paradigm Capital analyst Daniel Kim says there is still room for investors to make money on Baylin Technologies (Baylin Technologies Stock Quote, Chart, News: TSX:BYL).

On Wednesday, Baylin announced it had acquired the radio frequency and microwave divisions of Montreal-based Advantech Wireless for $49-million.

“The addition of Advantech’s RF and microwave divisions is a transformational acquisition for Baylin that will enable us to accelerate growth in our wireless-infrastructure segment by broadening our product offering and providing us access to new verticals and geographies,” said Randy Dewey, Baylin’s president and chief executive officer.

While Kim says he likes this pickup, he notes that it is not without its challenges.

“On balance, it is a solid acquisition with more pros than cons for BYL,” the analyst says. “On the positive side, Advantech’s high-margin business will boost BYL’s margin, cash flow and EPS. It will also complement BYL’s base station product suite and provide next-gen millimeter wave technology. However, this diversification strategy adds material risk to BYL as the company shifts focus from its core business and to lower growth verticals. It is also saddled with material debt with TTM net debt/EBITDA at 2.47x; however, we forecast that ratio will fall to 1.40x for 2018.”

In a research update to clients today, Kim maintained his “Buy” rating and one-year price target of $5.00 on Paradigm Capital, implying a return of 47 per cent at the time of publication.

Kim thinks Baylin will generate EBITDA of $5.4-million on revenue of $88.8-million in fiscal 2017. He expects those numbers will improve to EBITDA of $144.0-million the following year.