good natured products gets new $1.80 price target at Beacon Securities

Beacon Securities launched coverage on Thursday of good natured products (good natured products Stock Quote, Chart, News, Analysts: TSXV:GDNP) a packaging and consumer products company representing what analyst Ahmad Shaath labelled a sustainability play in the massive petroleum-based products industry. Shaath started off GDNP with a “Buy” rating and $1.80 price target, which at the time of publication represented a projected one-year return of 71 per cent.

Founded in 2006, Vancouver-based good natured products makes and distributes plant-based alternatives to everyday products in the North American packaging and consumer goods markets. GDNP offers its customers — including retailers, healthcare providers, food producers and packers, CPG companies, restaurants, thermofoaming companies and other industrial processors — solutions to detoxify work and home environments, enhance performance and provide a sustainable alternative to conventional product and packaging.

The company, which went public in 2015, now has over 100 plant-based food packaging designs, ten grades of bioplastic rollstock and 30 home and business organizational items, with a current product portfolio of about 385 products sold to about 500 B2B customers.

Shaath said GDNP has moved past its “proof of concept” stage and reached an inflection point in 2020 with a number of key acquisitions.

“Fiscal 2020 has been a pivotal year for good natured where it moved into vertical integration, adding thermoforming and extrusion capabilities,” said Shaath in his coverage initiation. “The company has a proven formula that centres around buying businesses that provide strong book of clients, to help it generate strong organic growth, and add complementary products to cross-sell into its existing books of business.”

“Over the years, GDNP built a reputation as the buyer-of-choice for family-owned businesses in the petroleum-based packaging industry. Thus we expect the company to continue to be a prudent allocator of capital through M&A to create shareholder value. GDNP typically pays less than 1.0x sales for its acquisitions and utilizes its shares to ensure sellers remain aligned, as normally they continue as part of the management team,” the analyst said.

On GDNP’s M&A strategy, Shaath noted management’s target of 50 per cent of the company’s growth to come through acquisitions and its focus on family-owned businesses who manufacture petroleum-based products which GDNP can transition to plant-based offerings.

“GDNP aims to add brands and internal brand champions as it recognizes the power of grass-roots-like approach to its growth through M&A strategy,” Shaath wrote. “The company is increasingly building a reputation as the buyer of choice for in the industry, even outmuscling more financially-attractive offers from private-equity bidders in some cases.”

This year, good natured added both Shepherd Thermoforming in a $9.5-million deal as well as rollstock sheet extruder IPF for $16.7 million.

GDNP has seen its revenue increase, most recently represented in its third quarter earnings delivered in late November. There, the company’s Q3 topline rose 47 per cent to $4.7 million while year-to-date revenues were up 50 per cent to $11.4 million. non-GAAP EBITDA was a loss of $333,943 compared to a loss of $348,899 a year earlier.

On the quarter, CEO Paul Antoniadis wrote in the press release, “Our third quarter results demonstrate the strength of our business model, along with how our leading range of plant-based products creates market demand. We’ve grown to now serve over 400 recurring business-to-business customers and are fulfilling over 18,000 direct-to-consumer transactions on an annualized basis. Our continued investments in making it easy and affordable for customers to switch from petroleum to plant-based products are being very well received.”

Shaath commented that GDNP’s management team hits well above the company’s market cap.

“The senior management team has vast experience in the CPG industry, including CEO Paul Antoniadis who held senior roles at Best Buy, where he was CEO of Best Buy Europe, and Walmart, where he ran one of the largest Hypermarts (the precursor to the Supercenter),” Shaath said.

On the market prospects, Shaath estimated the company’s total addressable market to be between US$280 and US$300 billion in the US and $20 billion in Canada, while he noted that the market for bioplastics and biopolymers was estimated at about US$7 billion in 2018 and projected to reach about US$15 billion by 2023, representing a CAGR of ~16.5 per cent.

As for comparisons with its peer group, Shaath said the majority of pure-play plant-based plastics players are private, while at the same time contended that the very large plastic material and plastic packaging companies are not very good comparables given the diversity of their business models and mature, low-growth profiles.

“We believe it is more appropriate to look to a comparable group of companies that are high-growth and produce consumer products for the health and wellness market, benefiting from sustainability trends (i.e. plant-based etc),” Shaath wrote.

As such, Shaath estimated the valuation for GDNP at 6.5x EV/2022 sales, which would put it in line with the average among its peer group. The analyst thinks good natured will generate 2020 revenue and adjusted EBITDA of $17 million and negative $1 million, respectively, and 2021 revenue and EBITDA of $41 million and $3 million, respectively, followed by 2022 revenue and adjusted EBITDA of $50 million and $6 million, respectively.

Looking ahead, Shaath said potential catalysts for the stock include financial results featuring 50 per-cent-plus revenue growth and acceleration of profitability, M&A activity, new products launches and large national account customer wins.