good natured Products wins bullish new price target at Paradigm

A new acquisition in the United States is a first for Vancouver-based good natured Products (good natured products Stock Quote, Chart, News, Analysts, Financials TSXV:GDNP), a stock which represents a great play in the sustainable consumer goods market, according to Paradigm Capital analyst Corey Hammill. The analyst reviewed the new deal for DGNP in an update to clients on Thursday, where he kept his “Buy” rating and raised his 12-month target from $1.50 to $1.85 per share.

Good natured Products provides plant-based products and packaging and currently has over 385 products and services through wholesale and retail channels in areas such as plant-based, eco-friendly home organization products, compostable food containers, bioplastic industrial supplies and medical packaging.

The company on Wednesday announced a definitive agreement to acquire Ex-Tech Plastics, a thermoformed packaging processor based in Richmond, Illinois, which makes high-quality rigid plastic sheeting. Terms of the deal are US$14.1 million with US$6.3 million to be paid in cash, US$5.0 million in a term loan and a US$2.8-million mortgage with a US bank.

Founded in 1982, Ex-Tech’s main markets are in medical, retail and food and generated 2020 revenue, net income and EBITDA in 2020 of US$25.8 million, US$1.5 million and US$2.6 million, respectively. For GDNP, the acquisition will add 105 business-to-business customers, growing its B2B segment to about 600 customers altogether.

GDNP has had an existing partnership with Ex-Tech dating back a half-decade when good natured bought Ex-Tech’s bioplastic division.

“The combined entity positions us as one of North America’s leading commercial sheet extruders, serving over 200 thermoforming packaging companies across North America,” said GDNP CEO Paul Antoniadis in a press release. “This acquisition firmly secures the Company’s market positioning within our industrial roll stock market segment, while setting the stage for future expansion in production and manufacturing capabilities.”

Good natured’s share price shot up during last year’s fourth quarter, going from $0.14 at the start of October to as high as $1.85 by mid-February. The stock has pulled back since but is still up 27 per cent for the year. GDNP rose 16.5 per cent on Wednesday with the acquisition announcement.

But Hammill sees more upside from here, calling good natured’s first-to-market positioning in sustainable and environmentally friendly packaging a “clear opportunity to be a global leader” in developing and producing plant-based packaging materials.

“We continue to focus on the importance of global sustainability,” Hammill wrote. “GDNP offers investors a unique way to invest in the plant-based space without the infancy risk of many companies in the industry.”

“There are several near-term growth opportunities for the company — new products, new customers, cross-selling and acquisitions — which are expected to drive revenue growth. Management has the experience and a proven track record of growing the company from early stage to the $10-million revenue mark while successfully integrating several acquisitions. Clearly, the market is moving toward sustainable solutions and GDNP is one of only a handful of pure-play investment vehicles,” Hammill wrote.

Hammill has revised his estimates to reflect GDNP’s fourth quarter 2020 results (released on April 30) and the Ex-Tech acquisition and is now calling for 2021 revenue and EBITDA of $63.6 million (up from $39.3 million, previously) and $2.6 million (no change). For 2022, Hammill has estimated $94.8 million and $8.4 million.

As far as further acquisitions go, Hammill said the pipeline for good natured is robust, with the company targeting traditional petroleum-based products and packaging companies so as to convert them to making plant-based products.

“Conversion of petroleum-based production plants is straightforward: at the risk of oversimplifying, instead of using petroleum pellets, GDNP inserts plant-based pellets into the sheet extrusion machine (there is also some blade sharpening required),” Hammill said.

“The timeline of a plant conversion is more dependent on the customers and the current manufacturing schedule. This leaves the company with a large pool of potential acquisition targets. Acquisitions will allow GDNP to add new products quickly, expand its market reach and strengthen the supply chain,” he wrote.

On the Ex-Tech deal, Hammill noted that it is expected to close during the second quarter of this year and that GDNP will be working to convert its operations over the next 12-18 months.

More broadly, Hammill said the rise in e-commerce and shipping, spurred on by COVID-19, is causing many to call 2021 ‘the year of sustainable packaging’.

“The reliance consumers have placed on packaging over the past year has had an immense effect on their perceptions and willingness to consider sustainable packaging when making purchases. Trivium’s Packaging Survey found that two-thirds of consumers place an importance on buying products that come in recyclable packaging, while over 50 per cent are at least taking it into consideration when making purchases. Overall, 73 per cent of consumers have shown a willingness to pay more for eco-friendly packaging, making it an industry to watch in the coming years,” Hammill said.

Hammill said on a consensus basis, GDNP’s revenue is expected to grow at a 72-per-cent CAGR over the next two years versus traditional packaging companies at about one per cent over the same period.

At the time of publication, Hammill’s new $1.85 target represented a projected one-year return of 54 per cent.