Take a pass on DIRTT Environmental Solutions, Industrial Alliance says

Too much of a good thing is the problem for DIRTT Environmental Solutions (DIRTT Environmental Solutions Stock Quote, Chart TSX:DRT), according to Industrial Alliance Securities analyst Neil Linsdell, who on Wednesday changed his rating from “Buy” to “Hold” based on share price appreciation.

Makers of prefabricated interiors, DIRTT management provided guidance with its fourth quarter results last month which called for 2019 revenue growth of between five and ten per cent. Linsdell notes that while this would represent a deceleration from the double-digit growth that DIRTT has experienced over the last few years, the analyst believes that management is being conservative in its forecast, allowing Linsdell to slightly raise his estimates for 2019.

The analyst is calling for 2019 revenue growth of 8.8 per cent and Adjusted EBITDA growth of 9.9 per cent. Linsdell says that while he is now increasing his target from $9.00 to $9.50 for DRT, the return on investment has been cut to 4.4 per cent, prompting the rating change.

“2019 will be a transition year. With a mostly changed, and beefed up, senior management team, DIRTT is finalizing restructuring efforts and establishing a platform for sustainable growth that will also deliver strong profitability and cash generation,” Linsdell says.

“Management is planning to present its three-to five-year strategic plan in Q3. Although we do not expect any dramatic changes to the existing business plan, we do anticipate more insight into efficiency improvements, capacity additions, a more focused sales and marketing strategy (including a national accounts program), and returning capital to shareholders, with a roadmap towards a higher growth rate into 2020,” he adds.

“In the interim however, the recent rapid share price appreciation prompts us to reduce our recommendation from Buy to Hold,” Linsdell says.

The analyst is predicting 2019 revenue and EBITDA of $388 million and $61.7 million, respectively, and 2020 revenue and EBITDA of $427 million and $74.7 million, respectively.