DIRTT Environmental is still a no-go, says iA Capital

Neil Linsdell of iA Capital Markets thinks DIRTT Environmental Solutions (DIRTT Environmental Solutions Stock Quote, Chart, News TSX:DRT) is firmly stuck in the mud, maintaining a “Sell” rating for investors with a target price of $1.45/share for an implied loss of 44.2 per cent in an update to clients on Wednesday.

Founded in 2003 and headquartered in Calgary, DIRTT Environmental Solutions designs, manufactures and installs prefabricated interior construction solutions used primarily in commercial spaces across various industries and businesses in the United States as well as Canada and internationally through a network of international distribution partners.

Linsdell’s latest analysis comes after the company announced that its previous CEO, Kevin O’Meara, left the company and its board yesterday.

In the interim, Todd Lillibridge, Chair of DIRTT’s board, will assume CEO responsibilities while Michael Ford will serve as the company’s lead independent director. Meanwhile, an executive search firm will help DIRTT find a suitable replacement, and the company has indicated that Lillibridge does not intend to be a permanent candidate.

“Todd is the ideal person to lead the company during this interim period,” Ford said in the company’s January 18 press release. “He is approachable, deliberate and strategic. His work with leaders in the healthcare industry, which continues through his service on two leading academic medical centre boards, will be of real value as DIRTT looks to grow this important part of the business. He has a proven ability to seize new opportunities, motivate teams, delight customers and partners, and drive financial performance.”

O’Meara’s departure is the latest issue in a number of disruptions DIRTT has experienced in recent times and it comes after a request by 22NW Fund LP, the company’s largest shareholder at 19 per cent, to replace the Board with six new directors, with only O’Meara and Ford staying on. According to Linsdell, 22NW has indicated that it has executed documents representing 50.4 per cent of the outstanding shares in (non-binding) support of its proposal, although no record date has been set for a shareholder meeting.

On January 4, DIRTT expressed concerns with 22NW in response to a Preliminary Proxy Statement made by the latter to the U.S. Securities and Exchange Commission (SEC) on December 23, asserting that 22NW had made misleading statements in regards to having a representative appointed to DIRTT’s board, as well as casting doubts as to whether or not some of the company or its representative’s trading activities were in compliance with various disclosure and reporting obligations under Canadian and US securities laws. 

Noting that the company’s financial performance has been lagging since before the onset of the pandemic, Linsdell has kept his projections intact, forecasting year-end revenue of $146 million for 2021 (all forecasts are in US dollars), a 15.1 per cent drop from its reported 2020 revenue of $172 million. Linsdell projects a jump to $193 million in 2022 for an implied year-over-year increase of 32.2 per cent, followed by another jump to $245 million, implying a year-over-year increase of 26.9 per cent.

“Although we believe that DIRTT can continue to benefit from ongoing construction spending in Healthcare, Education and Government verticals, approximately 60 per cent of revenue is generated from Commercial markets,” Linsdell said. “We expect that commitments to significant builds or remodelling projects will continue to be weak and decisions generally deferred when possible until clients can have better confidence in their business outlooks and office requirements.”

Meanwhile, after projecting losses of $36.9 million in 2021 and $9.1 million in 2022, Linsdell forecasts the company’s adjusted EBITDA to turn positive in 2023 at $12.6 million to imply a margin of 5.1 per cent. 2023 is also when Linsdell introduces an EV/EBITDA multiple projection, presently set at 17.3x.

Linsdell’s EPS forecasts also show negatively for the company, though it does get closer to a return after projecting a loss of $0.57/share in 2021, improving to a $0.36/share loss in 2022 before getting close to even at a $0.07/share loss for 2023.

Overall, Linsdell believes the worst is behind DIRTT but says the company’s recovery will be slow.

“While we like DIRTT’s solutions and believe that its product offerings are unique and valuable, we are skeptical of much near-term traction in this uncertain environment as evidenced by ongoing push out of projects, and project delays and deferrals due to supply chain disruptions, labour issues, and a general lack of urgency from clients due to pandemic-related uncertainty,” Linsdell said.

DIRTT’s stock price has dragged over the last 12 months, resulting in a 12.9 per cent loss in that time period and a 4.9 per cent drop since the calendar turned to 2022. The company ended 2021 with a 52-week low of US$1.68/share on December 28, falling from its 52-week high of US$4.88/share.