EnWave scores a target boost from iA Securities

Neil Linsdell of Industrial Alliance Securities continues to have confidence in EnWave (EnWave Stock Quote, Chart, News, Analysts, Financials TSXV:ENW), reiterating his “Buy” rating while raising his target price to $1.85/share from $1.10/share in an update to clients on Monday.

Vancouver-based EnWave is an applied technology company that licenses, builds and installs commercial-scale dehydration platforms for companies in the food, pharmaceutical and cannabis sectors. The company has developed the Radiant Energy Vacuum (REV) for dehydrating organic materials and has a subsidiary, NutraDried Food, that makes and sells dehydrated dairy-based snacks.

Linsdell’s latest analysis comes after EnWave reported its fiscal third quarter 2021 financial results for the period ended June 30, 2021. Linsdell said the Q3 numbers came in well ahead of expectations.

“EnWave has come through a few rough quarters, losing a significant portion of its Moon Cheese sales as programs with Costco have apparently ceased and as pandemic restrictions impacted sales efforts,” Linsdell said. “The Company staged an impressive rebound in Q3, with good momentum and pipeline in REV unit sales and traction in Moon Cheese and bulk cheese sales that provide a much better outlook into F2022.”

EnWave reported $7.4 million in revenue for the quarter, marking a return to form with a 57.4 per cent quarter-to-quarter increase and 23 per cent year-over-year increase, driven by a rebound from NutraDried to $3.8 million (62 per cent quarter-to-quarter increase, 14 per cent year-over-year decrease) with a pivot to selling its REV-dried cheese in bulk for partners to include as ingredients after ceasing its Costco shipments, while progress on its ongoing REV contracts yielded an additional $3.2 million in revenue. 

The result also significantly outpaced Linsdell’s projection of $4.8 million and the consensus estimate of $6.1 million.

The company also took measures to improve its profits, according to Linsdell, who noted that a restructure earlier in the year led to reduced selling, general and administrative expenses to produce a $900,000 gain in EBITDA compared to a $1 million loss last year, while the gross margin jumped to 35.6 per cent from 26 per cent.

Linsdell believes the company’s momentum will only keep growing in the future thanks to continued improvements in its Moon Cheese sales projections, the addition of Alliance Sales & Marketing as a US broker to accelerate distribution into new retailer for NutraDried beyond its current 25,000 locations, along with a distribution deal with Wal-Mart and an equipment partnership with Dole for fruit and vegetable snacks and ingredients.

Linsdell notes that EnWave could also diversify its offerings to target the pharmaceutical industry, particularly after Merck published a research paper in January citing EnWave’s freezeREV process as a viable alternative to vial-based lyophilization for vaccines and biologics, with the process having reduced drying-cycle times by 80 to 90 per cent versus lyophilization (freeze drying). The company has also signed a material testing agreement with AstraZeneca to  facilitate trialling REV technology for the dehydration of liquid monoclonal antibody formulations, with testing to take place at EnWave’s facility in Vancouver.

On the cannabis front, Linsdell said the sector still represents a great opportunity for EnWave.

“EnWave had early success with cannabis producers in Canada although some of those early REVTM unit sales resulted in idle machines that failed to produce anticipated royalties. However, based on years of discussions, trials, and sales with these producers, EnWave has further refined its technology and in December 2020 launched its Terpene Max protocol for drying cannabis at temperatures below 40 ̊C in under two hours – retaining 88 per cent of the terpenes of the fresh flower, and ten per cent more than room dried flower,” Linsdell wrote.

“The firm has also now entered the US market, which remains a much larger opportunity. The Company is estimating potential demand for 20 120kW units from its pipeline of US cannabis partner discussions,” he said.

EnWave’s quarterly results have also prompted updates to Linsdell’s financial estimates moving forward, as he now projects EnWave to reach $26.7 million in revenue instead of $24.3 million to slightly lower its year-over-year decrease to 18.8 per cent instead of the initial 26.1 per cent drop. Linsdell foresees things getting brighter in 2022 and 2023, with a projected 33 per cent year-over-year increase to $35.5 million (previously $33.1 million) in play for 2022, followed by a potential 22.5 per cent year-over-year jump to $43.5 million in revenue (previously $42.1 million) now in place for 2023.

Linsdell is now forecasting positive annual EBITDA one year earlier than before, as he has lowered his 2021 loss projection to $800,000 from $4.9 million before going positive in 2022 at a projected $4.2 million and 11.8 per cent margin (previously forecast as a $700,000 loss), followed up by a revised estimate of $7.5 million and 17.2 per cent margin for 2023 compared to the initial estimate of $4.5 million and 10.7 per cent margin.

Linsdell’s key trading multiple projections also come into focus in 2022 and beyond, projecting an EV/adjusted EBITDA of 21.9x for 2022, followed by a drop to a projected 12.2x for 2023. Meanwhile, with a projected positive EPS of $0.01/share in play, the analyst has the price-earnings ratio projected at 116.1x for 2022, with an estimated freefall to 21x in play for 2023. At press time, Linsdell’s $1.85 target represented a potential return of 92.7 per cent.

EnWave’s stock price has slightly risen since bottoming out for 2021 at $0.88/share, though it is still down about ten per cent for the year to date, reaching a high point of $1.74/share on February 10.