Buy Baylin for a big return, Paradigm Capital says

Following the company’s third quarter results, Paradigm Capital analyst Kevin Krishnaratne is maintaining his bullish stance on Baylin Technologies (Baylin Technologies Stock Quote, Chart, News TSX:BYL).

On Tuesday, Baylin announced its Q3, 2019 results. The company lost $718,000 on revenue of $36.4-million, a topline that was down 4.6 per cent over the same period last year.

“We announced in September that financial results for the third quarter of 2019 would not meet expectations. Challenging industry dynamics have continued to soften demand from several of our primary customers. In addition, the decision to invest in massive MIMO production in our new facility in Vietnam resulted in expenses in the third quarter of 2019 that were not anticipated in the 2019 budget. Additionally, our infrastructure group has seen a softening in its business with its Tier 1 telco customers experiencing a delay and/or reduction in capital expenditures until 2020, as well as a postponement of a significant base station project,” CEO Randy Dewey said. “We are pleased with the progress that we have made to rectify the legacy issues of Advantech Wireless that existed at the time we acquired the business. Although these issues continue to have a negative impact on profitability, we believe most of them are now behind us. We stand by our previously stated goals for cost synergies and we are seeing accelerated revenue opportunities in adjacent markets where Advantech has not traditionally participated.”

Krishnaratne says the BYL results were about what he had expected.

“Baylin announced Q3 results that were in line with the guidance it provided in September,” he noted. “Although the near term for infrastructure remains soft, we believe the setup heading into 2020 is strong, with multiple opportunities for upside to materialize on the back of 4G densification and 5G roll outs.”

The analyst says he expects trends in Baylin’s sector to rebound in 2020.

“While BYL expects the issues it has seen in Q3 to continue into Q1/20, it is starting to see a pick-up in activity in Infrastructure already and anticipates the division will deliver growth in 2020,” he wrote. “Management expects gross margin to increase in Q4/19 and into 2020 as Infrastructure and Embedded revenue rebounds. Baylin continues to remain quite focused on profits, anticipating a further $4.0M in annualized cost savings to be achieved. We expect Q4 revenue to be $34M with EBITDA at $2.2M, suggesting Q3 will be the bottom for the company from a profitability perspective.

In a research update to clients today, Krishnaratne maintained his “Buy” rating and one-year price target of $3.75 on Baylin, implying a return of 178 per cent at the time of publication.

The analyst expects BYL will post EBITDA of $12.7-million on revenue of $157.3-million in fiscal 2019. He thinks those numbers will improve to EBITDA of $19.1-million on a topline of $172.6-million the following year.

Krishnaratne says there are multiple opportunities for upside with BYL.

“Despite near-term softness that is largely transitory in nature and related to industry-wide issues (slower-than-expected paced of small cell deployments at U.S. carriers, strategic issues such as carrier M&A), the set-up is strong for a rebound in Infrastructure in 2020. We highlight several recent industry data points in this report that should be positive tailwinds for the company. We further note how Baylin has remained strong in the face of the current downturn by diversifying its mix of revenue streams and entering into new product areas, including its recently launched basestation (BSA) offering that should start to see orders in H1/20,” he added.