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DIRTT Environmental is still a pass, says iA Capital

DIRTT Environmental

The year ahead will continue to be a challenge for DIRTT Environmental Solutions (DIRTT Environmental Solutions Stock Quote, Chart, News TSX:DRT), according to Neil Linsdell of iA Capital Markets who nonetheless sees the company to be slowly finding traction again. In a Friday report, Linsdell upgraded DIRTT from a “Sell” to a “Hold” rating and raised his target price from $1.65/share to $2/share for an implied loss of 8.7 per cent.

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, Canada and internationally through a network of international distribution partners.

Linsdell’s latest analysis comes after the company released its financial results for the fourth quarter of its 2021 fiscal year which were headlined by revenue of $42.9 million to produce a small beat in relation to the iA projection of $41.4 million and the consensus estimate of $41.3 million and coming in slightly ahead of the $42.2 million the company reported in the same quarter of 2020.

On the flip side, the company’s gross margin for the quarter dropped from 32 per cent to 25.3 per cent, primarily on account of higher input costs and underutilized capacity. Meanwhile, the company’s adjusted EBITDA was another miss for the quarter at a $9.7 million loss, well off the iA projection of a $5.9 million loss and the consensus estimate of a $7.1 million loss.

DIRTT is in the midst of an organizational restructure in which the company is looking to save $15.2 million annually, including $10 million in reduced operating expenses and $5.2 million in reduction to cost of goods sold by reallocating some of its manufacturing process and closing its Phoenix plant.

“We started a process several months ago at the board, which took on greater urgency following our third quarter,” said Todd Lillibridge, interim Chief Executive Officer of DIRTT in the company’s February 23 press release. “We have had the advantage of being able to capitalize on our directors’ rich, multi-disciplinary experience in the verticals in which we operate and the technology that drives our business.” 

The company also provided future financial guidance, expecting revenue for the opening quarter of 2022 to be  between $38 million and $42 million, with an annual revenue target between $170 million and $180 million.

With year-end figures now in play, Linsdell has some revisions to his future financial projections and is introducing 2024 targets for DIRTT. After posting $148 million in revenue for 2021, Linsdell forecasts a jump for DIRTT to $173 million in 2022, down from the previous estimate of $193 million but still representing a year-over-year increase of 16.9 per cent. Looking to 2023, Linsdell has reduced his revenue target from $245 million to $230 million to indicate year-over-year growth of 32.9 per cent, while his newly introduced 2024 estimate of $283 million implies a year-over-year jump of 23 per cent.

Meanwhile, after finishing the 2021 fiscal year with a loss of $41 million, Linsdell forecasts the company’s adjusted EBITDA to remain negative in 2022 at a $24 million loss before turning positive in 2023 at $10 million to imply a margin of 4.3 per cent (previously $15.2 million and an implied margin of 6.2 per cent), further expanded to a projected $26.4 million and implied margin of 9.3 per cent in 2024.

2023 is also when Linsdell introduces an EV/EBITDA multiple projection of 18.5x, which he forecasts to drop to 7x in 2024. Linsdell’s EPS forecasts also show negatively for the company, though it does get closer to a return after ending 2021 at a loss of $0.63/share, improving to a $0.52/share loss in 2022 (previously forecast as a $0.37/share loss) before getting close to even at a $0.12/share loss for 2023 (previously $0.04/share loss) then barely turning positive in 2024 at a projected $0.01/share.

At this point, Linsdell believes the worst is behind DIRTT, given its $302-million project pipeline and 55 per cent historical conversion rate, though the road ahead won’t always be easy.

“While 2022 will continue to be a challenge for DIRTT, with a restructuring currently in progress and permanent CEO search underway, we do see the new sales initiatives and operational changes being a step in the right direction,” Linsdell said. “As we anticipate further transition out of the pandemic, we do believe that workspaces will be under reevaluation and that DIRTT is relatively well-positioned to support the upcoming, more flexible, work environment.”

DIRTT posted a 28.3 per cent loss over the last 12 months and a loss of 16.5 per cent since the start of 2022. The summer months last year saw DIRTT rise to a 52-week high of US$4.88/share on August 2, only to drop to a 52-week low of US$1.53/share by February 3.

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About The Author /

Geordie Carragher is a staff writer for Cantech Letter
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