DIRTT Environmental has a 17 per cent upside, Industrial Alliance says

Robust growth and improved profitability have Industrial Alliance Securities analyst Neil Linsdell feeling bullish about DIRTT Environmental Solutions (DIRTT Environmental Solutions Stock Quote, Chart TSX:DRT), with Linsdell now maintaining his “Buy” recommendation while increasing his target price from $8.00 to $9.00.

DIRTT delivered its fourth quarter and 2018 year end results on Wednesday, with CEO Kevin O’Meara saying that the company is now at an inflection point in terms of growth potential.

“2019 is the transformational year when we set the foundation to scale the Company,” said O’Meara in a press release. “It began with making sure we have the right leadership team in place and we are close to successfully completing this phase of the transition. The next steps are to enhance our approach to sales and marketing and improve our operations, which are the key focus areas for the balance of 2019. We expect that as we make progress on these fronts, we’ll be even better positioned to capture the incredible growth opportunity in front of us.”

Linsdell says DIRTT’s Q4 revenue of $98.7 million beat his forecast of $86.0 million as well as the consensus $86.3 million, while its Adjusted EBITDA of $17.5 million was also above his $8.7 million estimate and the Street’s $10.0 million (and better than a loss of $1.0 million a year prior). The analyst chalks up the profitability improvement to a reduction in non-revenue generating marketing and trade show expenses, travel, meals and entertainment.

“After a tumultuous year that saw multiple executive changes, DRT reported strong Q4 and 2018 results,” Linsdell said in a client update Thursday. “However, management is guiding for more moderate growth (5-10 per cent) in 2019, bringing expectations roughly in line with the existing 2019 consensus range. As it completes its restructuring it is establishing a base of operations from which it expects to generate more substantial growth in subsequent years. We remain positive on the market opportunities and on the Company’s ability to deliver profitable growth longer-term.”

Linsdell thinks that DIRTT will generate Adjusted EBITDA in 2019 of $59.7 million on revenue of $381 million and Adjusted EBITDA in 2020 of $69.7 million on a top line of $417 million. His $9.00 target represented a projected return of 16.6 per cent at the time of publication.