Take a pass on DIRTT Environmental, Beacon Securities says

On the basis of lower than expected Q4 2017 results and troubling information gaps in its reporting, DIRTT Environmental Solutions (DIRTT Environmental Stock Quote, Chart, News: TSX:DRT) gets a target price drop from analyst Gabriel Leung at Beacon Securities, who on Thursday reiterated his “Hold” rating with a new $5.50 (was $6.50) target.

On Wednesday, interior construction and 3D software company DIRTT delivered its three- and 12-month ended December 31, 2017, results, with interim CEO Michael Goldstein saying that his company is aiming high in 2018.

“This an important time for DIRTT, as we move forward from a significant 2017 investment year with a clear path toward profitable growth,” says Goldstein in a press release. “Our fourth quarter and year-end results are evidence that we have invested ahead of the curve to prepare for growth. We are seeing a build of significant projects in 2018, with revenue expectations for the first quarter of 2018 in the range of $78 million to $80 million.”

The company reported a revenue increase of 9.9 per cent for the year over 2016, reaching $293.4 million, along with a Q4 revenue decrease of 5.1 per cent compared to Q4 2016, down from $78.3 million to $74.3 million.

That Q4 $74 million topline along with an EBITDA of $541,000 came in lower than expected, says Leung, who had estimated $90 million and $13.9 million, respectively, whereas the consensus was $87 million and $12.3 million, respectively.

A few unknowns were problematic, says Leung, as the company did not disclose the extent of revenue contributions from a previously announced Fortune 100 customer, nor did it disclose expected contributions from the customer for 2018. As well, DIRTT didn’t provide a precise timeline for the hiring of a permanent CEO and CFO, an executive shakeup that occurred in January.

“In our opinion, there’s a credibility gap that needs to be addressed before we get more positive on DIRTT, particularly as it relates to the full year EBITDA margin outlook,” says the analyst in a research note to clients. “For 2018, we’ve applied 15 per cent revenue growth against EBITDA margins of 12 per cent pending additional data points over the year.”

Leung’s $5.50 target is based on a 10x CY18e EV/EBITDA valuation and represents a 12 per cent return at the time of publication.