Take a pass on Exco Technologies, Industrial Alliance says

Weakness in both of Exco Technologies’ (Exco Technologies Stock Quote, Chart, News: TSX:XTC) operating divisions resulted in revenue and EBITDA declines in Q2/F18, says analyst Nav Malik of Industrial Alliance Securities, who in a research update on Friday maintained his “Hold” recommendation with a slightly raised target price of $10.25.

A global supplier to the die-cast, extrusion and automotive industries, Exco reported its fiscal second quarter ended March 31, 2018, financials on Wednesday, posting sales of $148.4 million and net income of $10.6 million. Those numbers were down from the same quarter last year at $153.8 million and $12.6 million, respectively.

“Exco continued to demonstrate sequential earnings improvement again this quarter”, said Brian Robbins, President and CEO of Exco, in a press release. “We see many opportunities that will enable us to carry this momentum through the remainder of our fiscal year.”

Malik says Q2’s consolidated EBITDA of $19.0 million came in line with his estimate of $18.8 million but 5.5 per cent below consensus and 18.6 per cent lower than the same quarter in 2017.

“While both of Exco’s operating segments (Automotive Solutions (AS) and Casting and Extrusion (C&E)) were weaker than last year, AS was a larger drag on quarterly performance. EBITDA declined by 25.0 per cent in the AS segment compared with a 6.7 per cent drop in the C&E segment,” says the analyst.

Malik says he’s encouraged by the pipeline for new orders in the automotive and casting and extrusion segments and feels that the company’s capital investments at its Newmarket, Ontario, facility are improving efficiency, with similar results expected in its casting plants in Ohio and Mexico.

“We believe macro and company-specific headwinds will persist until the impact of new programs and capital investments start to gain momentum through F2019,” he says. “Our target price of $10.25 is based on an EV/EBITDA (NTM, one-year forward) multiple of 5.4x (unchanged), in line with peer averages.”

Malik thinks XTC will produce revenue and EBITDA in fiscal 2018 of $562.9 million (revised from $561.4) and $73.5 million (unchanged), respectively, and revenue and EBITDA in fiscal 2019 of $572.4 million (revised from $578.2 million) and $77.1 million (unchanged), respectively.

The analyst’s $10.25 target represents a projected 12-month return of 4.9 per cent at the time of publication.