DIRTT Environmental gets price target cut from Laurentian Bank

Although she remains bullish on the stock, Laurentian Bank analyst Elizabeth Johnston is dropping her target price for DIRTT Environmental Solutions (DIRTT Environmental Solutions Stock Quote, Chart, News TSX:DRT) after the company’s lowered guidance.

The analyst now rates DRT a “Buy” (unchanged) with an $8.25 target (was $9.50), saying in an action note to clients that the sales ramp for the interior construction company could now be slower than previously anticipated.

Calgary-based DIRTT, which manufactures customizable prefabricated building interiors, provided a fiscal 2019 revenue update on Tuesday, saying project delays along with the loss of certain expected projects is likely to impact revenue such that its previously issued guidance of revenue growth of between five and ten per cent is now dropped to flat compared to 2018’s top line. The company says that sales in 2019 have been “affected more than previously thought by an immature go-to-market approach and an inadequately supported sales force working on a long sales cycle.”

“We view 2019 as a transition year while we make the necessary changes to develop and strengthen DIRTT’s commercial function, which is core to our strategic plan,” said CEO Kevin O’Meara in the press release. “We created the chief commercial officer role and hired an executive for that position, established a national accounts function, and we’re implementing an appropriate sales organization with key processes, systems and metrics. These initiatives are integral to improving how we operate from a commercial perspective and we expect to realize incremental benefits as they take hold. I remain confident in the long-term growth potential of DIRTT.”

As a result, Johnston has lowered her revenue and EBITDA projections for 2019 along with a slightly lowered gross margin and higher one-time costs. For 2019, she is calling for revenue of $357 million and adjusted EBITDA of $49.7 million (previously $377.8 million and $59.7 million) and for 2020 she is calling for revenue and adjusted EBITDA of $423 million and $77.0 million (previously $447.9 million and $89.0 million).

“We understand that there has not been any change in success rate in terms of new contract wins, with it more visible given the weaker sales channel overall (which we had expected; the previous guidance of five to ten per cent growth was lower than historical rates),” wrote Johnston in a client update Wednesday.

“While we would expect that revenue related to timing shifts should be realized in 2020, we see additional risk that sales could ramp at a lower rate. As such, we have not shifted these sales into our 2020 forecast. Note that more specific guidance will be provided later in 2019 with the Strategic Plan. Overall, our long term outlook unchanged,” she writes.

DIRTT’s latest quarterly report came on July 30, where its second quarter ended June 30, 2019, featured revenue of $85.6 million, a six-per-cent year-over-year increase, and adjusted EBITDA of $9.1 million, a ten-per-cent year-over-year increase.

DRT’s share price has had an up and down year so far, having risen from $6.11 per share at the start of 2019 to a high of $9.30 by late April. The stock had been trading in the high-$6.00 range for the past couple of weeks but lost almost 13 per cent of its value in trading on Wednesday.