Beacon Securities analyst Ahmad Shaath continues to be bullish on good natured products (good natured products Stock Quote, Chart, News, Analysts, Financials TSXV:GDNP), reiterating his “Buy” rating and target price of $2.00/share for a 12-month projected return of 144 per cent in an update to clients on Tuesday.
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 third quarter financial results, which Shaath noted to be largely in line with expectations.
“We expect the company’s topline to continue to show strength, backed by capacity expansion (internally and with supply partners),” Shaath said. “Successful price increases and shipping surcharges should help margins recover from what we viewed as trough levels this quarter.”
The company’s financial results were headlined by $18 million in revenue, largely in line with the consensus expectation of $18.4 million for the quarter, while adjusted EBITDA came in at a loss of $600,000, remaining in line with the consensus projection of a $700,000 loss.
Given strong demand from a growing customer base, good natured also increased its prices, primarily through its Ex-Tech operation, to offset the cost inflation and were passed on to customers with a weekly lag.
The company reported a variable gross margin of 28.8 per cent for the quarter, toward the low end of Shaath’s projections and down compared to the 37.6 per cent margin reported on a year-over-year basis, as well as being down from the 34.7 per cent reported in the second quarter. Shaath attributed the miss to an unfavourable product mix (less medical packaging, more industrial products), customer mix (higher percentage of national accounts), and continued challenges to supply chain/logistics and cost inflation.
Meanwhile, the actual gross margin came in at 22.3 per cent; on a YTD basis, the company’s gross margin of 26.9 per cent is tracking ahead of the 23.7 per cent expectation set out by Shaath for 2021. The margin was aided by additional contributions from recent acquisitions IPF and Ex-Tech, as well as growing its organic customer base from 800 to 850.
“We did see some temporary changes in our Q3 2021 product and customer revenue mix with the recent addition of Ex-Tech, whose business is more heavily weighted to National customers and Industrial products with somewhat lower margin rates,” said Paul Antoniadis, CEO of good natured in the company’s November 30 press release.
“Based on our growth strategy and business model, we anticipate short-term, quarterly shifts in variable gross margin as part of that process and focus on delivering the optimal range on an annual basis. We’ve also rolled out several price adjustments and shipping surcharges to offset rapidly rising raw material and logistics costs being felt throughout the industry,” he said.
Shaath projects positive growth for good natured, forecasting a jump in revenue from $16.7 million in 2020 to $57.3 million in 2021 (previously $57.5 million), marking a potential year-over-year increase of 243 per cent. The growth arc continues into 2022, with a projection of $90.5 million producing a potential year-over-year increase of 57.9 per cent.
Meanwhile, after a reported loss of $1.5 million in 2020 and a projected $800,000 loss in 2021 (previously $1.4 million loss), Shaath projects the company’s EBITDA to turn positive in 2022 at $5.3 million, which would produce a margin of 5.9 per cent and a slight increase from the previous estimate of $5 million.
2022 is also when Shaath projects positive EPS for the first time for good natured at $0.01/share, following a reported loss of $0.06/share in 2020 and a projected loss of $0.05/share in 2021.
From a valuation standpoint, Shaath foresees a significant drop in the company’s EV/Revenue multiple, projecting a drop from 13.7x in 2020 to 4x in 2021, followed by a drop to a projected 2.5x in 2022. Meanwhile, Shaath’s initial projections for both the EV/EBITDA multiple (43.3x) and the P/E multiple (62.5x) in 2022.
Overall, Shaath believes good natured is still on the right path, with other potential momentum boosts on the horizon.
“We maintained our revenue forecast but tweaked our gross margins slightly higher, offset by slightly higher SG&A,” Shaath said. “Upcoming catalysts for the stock should come from M&A transactions, successful commissioning of capacity expansion at IPF and Shephard and significant contract wins.”
Overall, good natured’s stock price has dropped by ten per cent for the year to date, falling after hitting a high of $1.85/share on February 16, though it has experienced a near 20 per cent rebound since bottoming out at $0.69/share on October 6.