Baylin has price target cut at Paradigm, keeps “Buy” rating

It’s been a tough start to 2020 for Baylin Technologies (Baylin Technologies Stock Quote, Chart, News TSX:BYL), where issues related to the coronavirus have impacted the company, according to analyst Kevin Krishnaratne of Paradigm Capital. The analyst reviewed Baylin’s latest quarterly results in an update to clients on Friday where Krishnaratne kept his “Buy” rating but cut his target price by a third.

Custom-engineered antenna company Baylin, which serves the mobile, wireless and broadband sectors, announced its fourth quarter and fiscal 2019 year end results last Wednesday.

For the year, Baylin saw its revenue grow by 12.6 per cent to $153.3 million while adjusted EBITDA fell to $12.5 million from $15.3 million in fiscal 2018.

Citing challenging industry dynamics over the back end of 2019 and legacy issues relating to its major acquisitions of Advantech and Alga, Baylin president and CEO Randy Dewey said cost reduction measures implemented over the fourth quarter resulted in a noticeable drop in operating expenses. He also noted a $12.7-million impairment charge related to the two businesses.

“Since the closing of the acquisitions of Advantech and Alga, we have experienced a number of challenges dealing with ongoing, historical legacy issues, an industry wide shortage of a key component and integrating the two businesses. As a result, we have a more prolonged path to achieving the financial performance that we believe these two businesses are capable of generating. We, therefore, have concluded that the recoverable amount of the cash generating unit ("CGU") which has been determined by a value-in-use calculation using a discount cash flow model for Advantech and Alga is less than the carrying value, resulting in a goodwill impairment charge,” Dewey wrote in a press release.

Krishnaratne said the Q4 revenue of $30.0 million was light compared to his $33-million estimate and the Street’s $35 million, while EBITDA came out slightly ahead at $2.0 million versus his and the consensus $1.9 million. The analyst noted that year-over-year declines in Baylin’s Mobile and Embedded segments were partly offset by growth in Satellite and Infrastructure.

The analyst noted that COVID-19 is having its impact on Baylin, where its Wuxi, China, facility is not yet operating at full capacity after closures from the end of Chinese New Year to February 10, although expectations are for normalizing by the end of March.

“Baylin is riding the wave of an unprecedented infrastructure investment in global telecom networks. The company’s restructuring has dramatically improved its fundamental performance and recent acquisitions provide exposure to peripheral markets and should deliver accelerated EBITDA growth,” said Krishnaratne.

The analyst is optimistic about the longer-term for Baylin, saying the issues dogging the company are temporary while its opportunities on the back of 4G densification and 5G roll outs are looking good.

Krishnaratne rejigged his forecasts, now calling for fiscal 2020 revenue of $151.6 million (previously $163.6 million) and EBITDA of $18.1 million (previously $18.6 million. EPS is down to $0.10 per share from a previous $0.11 per share.

At press time, Krishnaratne’s new target of $2.50 (was $3.75) represented a projected 12-month return of 155 per cent.