PI remains neutral on Baylin ahead of Q1 results

It’s a case of darkest before the dawn for Baylin Technologies (Baylin Technologies Stock Quote, Chart, News TSX:BYL), says PI Financial analyst David Kwan, who says that profitability should improve over the second half of 2020.

In a quarterly preview to clients on Friday, Kwan left unchanged his “Neutral” rating and $1.60 per share target on Baylin, which at press time reflected a projected 12-month return of 49.5 per cent.

Toronto-based Baylin manufactures and sells passive and active radio-frequency products and services, selling into the wireless infrastructure, embedded solutions, satellite connectivity and mobile antenna markets. The company has seen its stock decline by 67 per cent over the past 12 months, with the share price staying within the $1.00 to $1.20 range over the past couple of months.

On the upcoming first quarter fiscal 2020 results due on Tuesday after market close, Kwan said he’s expecting quarterly revenue to be down 27 per cent year-over-year and down five per cent sequentially, which would be the lowest quarter in over two years and since the acquisitions of Advantech and Alga Microwave.

The challenging market conditions are to blame, Kwan said, with business disruptions caused by COVID-19 and the subsequent Q2 not looking any better. Kwan added that the year-over-year comparison will be especially glaring, as last year’s Q2 revenue of $47.8 million benefited from an abnormally strong order flow in Baylin’s Asia Pacific business and a strong rebound in its satellite communications segment.

But the second half of the year should be better, the analyst says.

“In addition to the typical seasonal pickup in the second half, particularly in the Asia Pacific (mobile) business, 2H FY20 results could benefit from some pent up demand following COVID-19 related business closures/curtailments. There has also been an uptick this quarter (Q2) in announced purchase orders (~$11 million, of which ~$9 million is from Alga) while the Wireless Infrastructure business could benefit from on-going 4G/LTE and 5G buildout activity, the closing of the T- Mobile/Sprint merger, and positive commentary from some key customers indicating little to no impact from COVID-19,” Kwan wrote.

Baylin announced cost reduction measures at the beginning of this year’s Q2, projected to save about $6.5 million a year with about one-third of that being permanent.

“With revenue expected to improve throughout FY20 and the reduced cost structure, profitability should see material improvements in the coming quarters,” Kwan added.

On the Q1 numbers, Kwan is calling for revenue of $28.5 million and adjusted EBITDA of $0.1 million. For fiscal 2020, the analyst is forecasting revenue of $146.0 million (down from $153.3 million in 2019) and adjusted EBITDA of $13.9 million (up from $12.5 million in 2019).

Baylin’s status vis a vis COVID-19 is that its operations remain open for business. The Quebec-based Advantech Wireless and Alga Microwave have been deemed essential businesses as suppliers to Canadian and American global communications companies, governments and agencies, while Baylin’s US subsidiary Galtronics has also been called an essential critical service as its products are used by a leading global aerospace and defence technology company.