M Partners analyst Andrew Hood launched coverage on Wednesday of cellular concrete company Cematrix (Cematrix Stock Quote, Chart, News TSXV:CVX) with a “Buy” rating and $1.20 per share target price, saying Cematrix is the best-in-class North American leader in an underdeveloped industry.
Microcap name Cematrix was founded in 1999 in Calgary, Alberta, as a supplier and installer of lightweight cellular concrete, a material which is highly flowable, lightweight, insulating, strong, self-levelling, energy-absorbing, freeze-thaw resistant and has low permeability. Its primary use is as a foundational material in tunnels, roads, bridges and projects involving weak and unstable soils.
Cematrix focuses its efforts on serving infrastructure projects and has four subsidiaries across the US and Canada and has a collaborative relationship with Lafarge Canada, the country’s largest construction materials company, giving Cematrix preferential pricing on cement, which accounts for 65 per cent of CVX’s material costs. In 2018, Cematrix acquired MixOnSite USA based in Chicago and in late 2019 Bellingham, Washington-based Pacific International Grout Co.
In his report, Hood noted that Cematrix is the only major supplier for cellular concrete in Canada and is the North American leader with only two large competitors in the US market.
“Both organically and inorganically, CVX has expanded its proprietary technology and formulations, density offerings, geographic footprint and management expertise in order to satisfy the widest array of customer needs. Its competitive advantages place the Company in an enviable position as the market for cellular concrete expands on the back of its superior attributes vs. alternatives, including lower costs, faster construction times, superior strength, more environmentally friendly, insulation properties, and more,” Hood wrote.
The analyst pointed to CVX’s “massive” backlog of $78.5 million, which is 1.8x its current enterprise value, with between $40 and $45 million of that revenue expected to come in 2020, and Hood thinks Cematrix should capture about 30 per cent of its plus-$275-million bid universe over the next couple of years.
Hood said upcoming quarters will likely see a boom in infrastructure projects, which is good news for CVX.
“In wildly uncertain times, CVX is positioned in the recession- resistant infrastructure markets which are likely to be the beneficiary of government stimulus in the near-term. Both the US and Canada have historically used infrastructure investments to keep the economy running, and both countries have aging infrastructure which require higher levels of investment,” Hood wrote.
The analyst is expecting EBITDA margins to expand to the mid-double digits for Cematrix, which has been improving on profitability since 2017.
Last week, Cematrix released its fourth quarter and full year 2019 results, which featured revenue of $22.6 million for the year compared to $17.6 million in 2018. For the Q4, revenue was down from $6.1 million a year earlier to $5.3 million.
With the release, management reported “very little” impact of COVID-19 on the timing of its projects and
said recent announcements say that governments will be raising infrastructure spending in aid of supporting the economy, which “should have a significant positive impact on our business going forward,” said president and CEO Jeff Kendrick.
Hood is calling for fiscal 2020 revenue and EBITDA of $40.0 million and $6.3 million, respectively, and for fiscal 2021 revenue and EBITDA of $50.0 million and $8.5 million, respectively.
At press time, his $1.20 target represented a projected 12-month return of 145 per cent.