Beacon Securities analyst Ahmad Shaath is feeling good about good natured products (good natured products Stock Quote, Chart, News, Analysts, Financials TSXV:GDNP), reiterating his “Buy” rating and target price of $2.15/share in an update to clients on Thursday.
Founded in 2006 and headquartered in Vancouver, good natured products makes a range of packaging and consumer products primarily from renewable, plant-based materials with no harmful chemicals, using various designs and grades of bioplastic rollstock sheets as well as home and business organizational products.
Shaath’s latest analysis comes after the company announced its second quarter financial results, which Shaath noted to be at the high end of the company’s pre-released range. good natured products produced total revenue of $12.4 million in the quarter, beating the consensus projection of $12.2 million.
The company’s variable gross margin (non-GAAP) of 34.2 per cent also came in at the higher end of the pre-released range of 31 to 34 per cent. Gross margin came in at 28.3 per cent against the pre-released range of 28 to 31 per cent. The company also reported negative adjusted EBITDA of $175,000, which was marginally below the consensus estimate of a $100,000 negative adjusted EBITDA.
Shaath attributes the negative adjusted EBITDA to higher selling, general and administrative costs associated with increasing its headcount to support growth initiatives, as well as being a response to strong inbound demand from clients.
The company has been busy over the quarter, headlined by finalizing the acquisition of Illinois-based Ex-Tech Plastics, which produces a variety of plastic sheet and film products, including extruded roll stock sheet for thermoformed packaging.
Following the Ex-Tech acquisition, the company announced plans to expand the facility’s annual production capacity by 50 per cent, to 33 to 35 million pounds annually, positioning the company to capitalize on interest in compostable and renewable packaging options, driven partially by government and industry-led initiatives in both the United States and Canada.
“We saw year over year rate changes from a higher product mix from our industrial business group, higher mix of national customers, higher mix of sales from our insource manufacturing, lower mix of COVID-19 medical face shields and packaging, and supply chain cost increases due to inflationary pressure which is anticipated to continue into 2022,” said Paul Antoniadis, CEO of good natured in the company’s August 26 press release.
“We also added several new team members to support our expanding customer base which positions the company for further growth and ensures a smooth integration of our recently announced acquisitions. End customer demand remains robust and we continue to focus on driving growth organically and through acquisitions, while leveraging intensifying long term positive macro trends,” he said.
Shaath’s projections have good natured on a strong growth trajectory, calling for a 244.3 per cent year-over-year increase in revenue for 2021 to $57.5 million over the reported 2020 figure of $16.7 million, followed by a projected jump to $90.6 million in 2022, which would mark a potential 57.6 per cent year-over-year increase.
The company’s gross profit margins are projected to decrease as costs increase, with Shaath projecting gross profit of $16.5 million and a 28.7 per cent margin for 2021, with increases to $26.9 million and a 29.7 per cent margin forecast for 2022.
After three years of negative adjusted EBITDA, Shaath projects a positive adjusted EBITDA of $1.5 million and 2.6 per cent margin for 2021, with an increase to $8.5 million and a 9.3 per cent margin forecast for 2022, which is also the first year Shaath projects a positive net income ($5.4 million) for the company.
The company’s valuation data brings positive news for the company, with Shaath projecting a drop in the EV/Revenue drop from 15x in 2020 to a projected 4.4x in 2021, dropping again to 2.8x in 2022. Shaath also brings the company’s EV/EBITDA multiple into focus from 2021 onward, projecting 170x before a drop to 29.7x in 2022, while the price-earnings ratio is projected to be 34.2x in 2022.
“At a current valuation of just 2.8x (EV/Sales FY22) versus peer average of 6.6x and median of 6.5x, GDNP shares represent an exceptionally attractive buying opportunity,” Shaath said.
While Shaath notes the possibility of the company’s margins for the second half of 2021 being impacted by continued cost inflation and logistical challenges, he also believes the company will continue to move forward in a positive manner.
“good natured announced Q2/FY21 results, highlighted by a strong top line that came in at the high-end of the pre-released figures. We expect the company’s results to continue to show strength, driven by full economic reopening, especially in Ontario,” Shaath wrote. “We maintain our target price of $2.15 and BUY recommendation.”
After peaking at $1.85/share on February 16, GDNP’s value has gradually decreased, though it has still produced a return of 5.6 per cent for the year to date. At press time, Shaath’s $2.15 target represented a projected return of 126 per cent.