Imaflex has 86 per cent upside, Beacon Securities says

Beacon Securities’ Ahmad Shaath says more competition in the Quebec market is hurting Imaflex Inc.’s (TSXV:IFX) margins, although he’s encouraged by signs of progress in expanding its sales pipeline for Shine N’Ripe XL crop protection film.

On Monday, the analyst maintained his “Buy” recommendation but lowered his price target from $2.00 to $1.75, representing a projected return of 86 per cent at the time of publication.

Makers of agricultural mulch films and polyethylene films for packaging, Montreal-based Imaflex announced its second quarter 2018 financial results on Monday, featuring $21.9 million in revenue, down from $24.1 million in Q2 of 2017.

“Although year-over-year results were somewhat muted in the second quarter, current business fundamentals are looking stronger,” said Joe Abbandonato, President and CEO, in a press release. “We just received another C$0.9 million citrus film order and we are beginning to see sales momentum in our core flexible packaging business. As well, we are setting the stage for future growth, recently securing C$10 million of equipment financing to fund business expansion.”

Shaath says the $21.9 million topline was slightly above his expected $21.7 million, while IFX’s adjusted EBITDA loss of $1.4 million came in below his forecast of $2.2 million, due, he says mostly to weaknesses in gross margins caused by a new entrant in the Quebec market.

“The company saw a good portion of the ‘defected’ customers come back towards the end of Q2/FY18, largely due to its better manufacturing quality and quick turnaround times, which should help margins bounce back,” says Shaath in an update to clients on Monday. “We expect these conditions to improve in FY19 (revision of -100bps to our previous margin assumptions). On the citrus film front, we made no major changes to our revenue and margin assumptions as we expect IFX to continue to be successful in landing repeat business from its existing customers as well as convert 1-2 “in trial” customers,” he said.

Shaath says he continues to view IFX as a relatively cheap play in the flex-packaging sector with potential for significant upside from its agricultural tech products, valuing IFX at 6.3x his FY19 EBITDA estimate.

The analyst has revised his projections, now calling for revenue and Adj. EBITDA in FY18 of $82.5 million (was $82.8 million) and $7.0 million (was $8.7 million), respectively, and revenue and Adj. EBITDA in FY19 of $97.7 million (was $99.0 million) and $9.4 million (was $10.6 million), respectively.