ZCL Composites stock still has upside, says Paradigm Capital

ZCL Composites (ZCL Composites Stock Quote, Chart TSX:ZCL) posted earnings and revenue misses in its third quarter financials but skies should clear up for the company heading into 2019, says analyst Corey Hammill of Paradigm Capital, who in a Monday research note to clients reiterated his “Buy” rating with the lowered target price of $9.00 (previously $11.00).

Fibreglass storage tank company ZCL reported its Q3 last week, coming in with revenue of $49.7 million, down five per cent year-over-year, and an Adjusted EBITDA of $8.1 million, representing 16 per cent of revenue and down 13 per cent year-over-year.

CEO Ted Redmond said the revenue shortfall stems from customer-directed delays in tank shipments but that the company’s backlog has increased.

"The fundamental issue facing ZCL is declining margins,” said Redmond in a press release. “We are committed to reversing this decline, and over the last two months the ZCL management team has conducted a detailed assessment of the reasons for declining gross profit and EBITDA margins and we have developed and are now implementing a detailed Profit Improvement Plan. We are confident that by 2020, the plan will restore our margins back to the historically strong levels of 2014 through 2017."

Hammill says ZCL’s Q3 missed on both revenue (Hammill’s estimate was $56 million) and Adjusted EBITDA (Hammill’s was $10 million), while the quarter’s EPS of $0.17 per share was also below Hammill’s expected $0.20 per share.

“Moving into Q4, typical seasonality combined with ongoing customer delays is anticipated to again reduce tank shipments,” says Hammill. “This will continue to pressure profits. We have updated our forecast to reflect the YTD results and management’s updated Q4 outlook.”

“We believe much of the current weakness is already priced into the share price. The company is under new executive leadership, and we expect to hear more about the profit improvement plan over the coming months. A return to typical customer delivery schedules and the increasing backlog both point to improved profits in 2019,” he says.

“Given ZCL’s track record, dominant market position and recent backlog growth, we see the current share price as a near-term bottom.”

Hammill has revised his estimates for 2018 and 2019, now calling for revenue and EBITDA in 2018 of $172.8 million and $22.7 million (was $189.3 million and $26.5 million) and revenue and EBITDA in 2019 of $186.1 million and $26.3 million (was $198.7 million and $33.1 million).

The analyst’s $9.00 target represents a projected return including dividend of 64 per cent at the time of publication.