Baylin Technologies is still a pass, says Paradigm

It’s a wait-and-see prospect on antenna solutions company Baylin Technologies (Baylin Technologies Stock Quote, Charts, News, Analysts, Financials TSX:BYL) according to Paradigm Capital Markets analyst Daniel Rosenberg. In an update to clients on Friday, Rosenberg maintained a “Hold” rating while reducing his target price from $1.10/share to $0.95/share for a projected return of ten per cent at the time of publication.

Founded in 1978 and headquartered in Toronto, Baylin Technologies designs and manufactures custom engineered antennas for mobile, wireless infrastructure and broadband devices, selling under the Galtronics, Advantech Wireless, Alga Microwave and Mitec brands.

Rosenberg’s latest analysis came after the company reported third quarter financial results which indicated sequential growth.

“Chipset shortages and supply chain disruptions affected the business, but demand is evident with the company reporting a record backlog,” Rosenberg said. “A recent capital raise provides the balance sheet with some breathing room, but debt levels remain elevated.”

The company’s financial report was headlined by revenue of $30.2 million; despite the figure being down 17.4 per cent on a year-over-year basis, it does represent a more recent bounceback at a 39.7 per cent sequential growth as revenue across all its business lines increased.

Adjusted EBITDA came in well ahead of Paradigm expectations at a $700,000 loss, a significant step forward sequentially from the $12.7 million loss incurred in the previous quarter, having minimized the impacts of a negative margin product.

At the end of the quarter, Baylin had $17.7 million in cash available compared to $36.7 million in debt, though its financial situation was slightly eased by the second tranche of a private placement for $5 million, putting the placement’s overall value at $15 million.

Furthermore, Rosenberg noted that Baylin’s lenders are providing flexibility by waiving covenants and removing some covenant restrictions for the remainder of the year.

Earlier in 2021, Jeffrey Royer, Chairman of Baylin, converted the $8.7 million principal of the company’s 6.5 per cent Extendible Convertible Unsecured Debentures to nearly eight million common shares, of 14.9 per cent of the company’s outstanding shares, to give Royer 48.7 per cent control or direction of all the company’s outstanding shares.

The company made a change at the top over the summer, appointing Leighton Carroll, a 25-year veteran of wireless networks with M&A expertise and strong relationships with large North American telecom companies, as its new Chief Executive Officer.

“I am enthusiastic about the opportunity to lead a company with world-class products and reach and particularly excited about the engineering talent at Baylin and their potential to drive growth and innovation,” Carroll said in the company’s June 7 press release. “I am eager to move the business forward and engage our customers to better serve their needs.”

Rosenberg noted that Carroll has made a number of positive moves since coming on board, including re-negotiating debt covenants with lenders and a large negative margin contract with an Asian manufacturer.

Rosenberg has revised some of his annual projections for the company, lowering his 2021 revenue projection from $125 million to $103 million, a drop of 16.2 per cent on a year-to-year basis. The gross margin projection takes a hit, as Rosenberg nearly halved his estimate from $27.7 million and a 22.1 per cent margin to $14.6 million for a 14.2 per cent margin, while the adjusted EBITDA is now projected at a $14.1 million loss compared to the initial forecast of a $1.9 million loss.

The revised figures provided a mixed view in relation to the consensus projection, as the projected revenue is lower than the consensus forecast of $104.8 million, and the adjusted EBITDA projects ahead of the consensus expectation of a $15.8 million loss.

For 2022, Rosenberg lowered his revenue target from $141.7 million to $127.2 million, gross profit from $46.2 million and a 32.6 per cent margin to $41.4 million and a 32.5 per cent margin, while still projecting EBITDA to turn positive at $12.7 million compared to the initial $14.3 million projection.

The revised Paradigm figures remain ahead of the consensus projections for both revenue ($122.6 million) and adjusted EBITDA, which the consensus forecasts as next to zero.

Overall, Rosenberg noted that the revised Baylin forecasts should do a better job of reflecting the impacts of supply-chain disruptions and chip shortages on the company.

“While we believe management is taking appropriate steps to fix the business, it will still take time for the outlook to improve,” he said. “While valuation appears attractive at current levels, risks remain elevated given a levered balance sheet, and continued operational and demand impacts from COVID.”

The stock price for Baylin Technologies spiked over January and February this year before pulling back and is now down 5.4 per cent year-to-date.