Good natured products has a 64 per cent upside, says Beacon Securities

Good natured products (Good natured products Stock Quote, Chart, News, Analysts, Financials TSXV:GDNP) is all cashed up for a busy 2021, according to Beacon Securities analyst Ahmad Shaath who delivered an update to clients on the company on Friday. Shaath reiterated his “Buy” rating and $1.80 target price, which at the time of publication represented a projected one-year return of 64 per cent.

Vancouver-headquartered good natured products makes and distributes packaging and consumer products made primarily from renewable, plant-based materials without harmful chemicals. The company currently has over 385 products and services in wholesale and retail from home organization products and compostable food containers to bioplastic industrial supplies and medical packaging.

GDNP announced on Thursday the closing of a $23.1-million bought deal financing including over-allotment involving about 19.3 million shares at an issue price of $1.20 per share. The company said proceeds will go towards future acquisitions, general working capital and capital expansion purposes.

Micro cap GDNP has seen a strong run-up in its share price over the past half-year, taking the stock from $0.14 in early October to as high as $1.85 by mid-February. The company saw revenue climb by 47 per cent year-over-year to $4.7 million for its third quarter 2020 and gross profit go from $1.0 million in Q3 2019 to $1.7 million for Q3 2020. Good natured released preliminary fourth quarter 2020 numbers in early January which anticipated a 62-per-cent year-over-year increase in revenue, with gross margins for the full 2020 estimated at between 35.5 and 37.5 per cent compared to 34.4 per cent in 2019.

“Our strategy remains centred on organic growth contributing 50 per cent of the overall increase and the other 50 per cent coming from acquisition activity,” said CEO Paul Antoniadis in a January 26 Letter to Shareholders. “Our revenue growth in 2020 was similarly driven by a mix of organic growth and growth through acquisitions. The closing of the IPF acquisition in December 2020 will set the basis for further revenue growth in 2021 to complement continued organic growth in our business.”

Commenting on the newly closed equity raise, Shaath said it should give good natured ample room to execute on its M&A strategy.

“Historically, the company supplemented the cash portion of its acquisitions financing with a combination of GDNP shares and other financing options such as VTB/mortgage on real estate,” Shaath wrote.

“We believe the company will be able to conclude at least one meaningful acquisition this year and potentially up to three total acquisitions. GDNP is targeting to further expand into new markets, both geographically and into new categories. The company will be also looking to have some level of vertical integration and/or operational synergies between the planned targets in a fashion that is similar to Shepherd/IPF.”

Shaath noted that GDNP has earmarked $4.0 million of the new funds for capex projects including the installation of a faster extrusion line at Integrated Packaging Films (IPF), a rollstock sheet extruder company purchased this past December. The new extrusion line, likely completed by the end of March, should be “extremely valuable” in helping GDNP over the peak retail season through the second half of the year, Shaath said.

“Having improved GDNP’s balance sheet, management is turning its full attention to product development, where the team now has more capabilities, materials and molds compared to previous years,” Shaath said.

“We are very optimistic about the product lineup that GDNP is working on and expect product launches with household-name partners, expansion into new categories and the addition of new bio-based materials. We expect the company to start announcing these product launches over 1H/FY21E period,” he wrote.

By the numbers, Shaath thinks GDNP will generate 2021 revenue and adjusted EBITDA of $41 million and $3 million, respectively, and 2022 revenue and EBITDA of $50 million and $6 million, respectively.

The analyst sees GDNP to be attractively valued on a comparative basis, pegging the company’s 2022 EV/Sales at 5.5x versus its peer group at an average 2021 EV/Sales of 20.7x (or 6.3x adjusting for one outlier) and a median of 6.5x.

“We believe this represents a compelling risk/reward trade as GDNP has hidden value from the available capacity at Shepherd and IPF (and expanding in the case of IPF with further expansion at Shepherd a likely event),” Shaath said.

“The company has a strong track record of delivering organic growth (averaging well above 50 per cent during 2018-2019) and will build on its newly-added verticals, especially in the medical packaging market, to continue to deliver on that front,” Shaath said.

“The company’s much-improved balance sheet and revenue profile following the IPF and Shepherd acquisition in 2020 should allow it to accelerate its M&A strategy, a key catalyst in 2021,” he wrote.