Imaflex has a big upside, Beacon Securities says

Lower sales were offset by better margins for Imaflex (Imaflex Stock Quote, Chart, News TSXV:IFX), says analyst Ahmad Shaath of Beacon Securities, who reviewed the company’s third quarter financials in an update to clients on Monday.

Montreal-based Imaflex, which specializes in the manufacturing and sale of polyethylene films for the packaging industry and agricultural mulch films, reported its third quarter ended September 30, 2019, on Monday, showing revenue of $19.2 million, down from $21.3 million a year ago, and EBITDA of $1.5 million, which was the same as Q3 2018.

“During the quarter, we continued to hold our own in a dynamic operating environment,” said Joe Abbandonato, President and CEO in a press release. “Despite lower sales prices resulting from competitive pressures and decreased resin costs, year-over-year profitability remained respectable and operating cash flows continued to be solid.”

Shaath says that the revenue miss (he was forecasting $21.4 million) can be chalked up to continued competition, lower resin prices and no sales for Imaflex’s crop protection film Shine N’ Ripe XL.

At the same time, the analyst pointed out that the company’s margins remained strong at 13.1 per cent versus his estimate of 10.5 per cent, resulting in the better-than-expected adjusted EBITDA of $1.5 million (Shaath was calling for $1.0 million). Imaflex’s fully diluted EPS was $0.01 per share versus Shaath’s $0.00 per share forecast.

The lack of Shine N’ Ripe XL sales looks to be the case for the rest of 2019 as well as 2020, according to Shaath, who noted that management didn’t provide an update on its backlog, which stood at $1.5 million as of the end of the second quarter.

Looking ahead, Shaath notes that Imaflex completed the installation of its new five-layer extrusion equipment and is in the process of commissioning it and that the company is working on other initiatives both operationally and from a sales perspective to increase its sales from high-margin, printed film using the new extrusion equipment.

“We have updated our model, with the major driver being the ramp up of the new equipment and sustainability of the improved margin profile. Our FY20E forecast call for IFX to have ~60 per cent utilization on its new lines by Q4/FY20E, where we assume sales from existing equipment to be flat year-over-year (consolidated revenue growth of 4.9 per cent year-over-year in FY20E). We expect benefits from increased sales of printed film product to be realized more toward the 2H/FY20E, which should help overall gross margins (we reflect improving gross margin over FY20E, from 13.0% to 13.5%),” writes Shaath.

The analyst’s new forecasts call for fiscal 2019 revenue of $83.3 million and adjusted EBITDA of $6.9 million and for fiscal 2020 revenue of $87.4 million and adjusted EBITDA of $7.0 million.

With the update, Shaath is maintaining both his “Buy” rating and $1.00 price target, which at press time represented a projected return of 72 per cent.

IFX closed down 1.8 per cent on Monday, with the stock now down 22.5 per cent year-to-date.