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Imaflex has a 32 per cent runway, says Beacon

The quarterly results were mixed from Imaflex Inc (Imaflex Stock Quote, Charts, Nes, Analysts, Financials TSXV:IFX) but there should be stronger demand for the company’s products over the rest of the year, according to Beacon Securities analyst Ahmad Shaath, who reviewed the numbers in an update to clients on Thursday.

Montreal-based Imaflex makes polyethylene films for the packaging and agriculture sectors in Canada and the US, with manufacturing facilities in Quebec and North Carolina. The company announced its fourth quarter 2021 and full-year results on Thursday, featuring Q4 revenue of $25.7 million, which was up 17.2 per cent year-over-year, while full 2021 revenue was up 24.0 per cent to $107.5 million.

“Imaflex continued to demonstrate the consistency and dependability of its business model in 2021,” said Joe Abbandonato, President and CEO, in a press release. “Despite the historic impact of the pandemic and a competitive operating environment, we reported our second consecutive year of record net income and cash flow generation remained solid. Both our Canadian and U.S. operations delivered strong results, reflecting the depth of our products and customer base, our growing scale and disciplined capital allocation strategy.”

Net income for the fourth quarter was $8.4 million, up 31.8 per cent year-over-year, but adjusted EBITDA was $3.3 million, down 10.1 per cent from 2020’s Q4 of $3.7 million. Earnings for the year saw net income rise 31.8 per cent to $8.4 million while adjusted EBITDA was up 11.1 per cent to $14.2 million. Imaflex’s cash at the quarter’s end was $8.5 million, up five per cent sequentially.

Imaflex gave an update on its Advaseal product, a plastic mulch film that involves a controlled release of pesticides, saying the lab work has been slower than anticipated in preparation for getting four of the five active ingredients used on Advaseal registered with the US Environmental Protection Agency.

“Imaflex is working closely with the lab to ensure the process is completed as soon as reasonably possible and the Corporation remains focused on submitting the ADVASEAL registration package to the U.S. EPA,” the company said.

On the 2022 year, Imaflex said demand looks to be strong, with Q1 2022 sales volumes expected to surpass those of Q4 2021. The company also said that both COVID-19 and geopolitical unrest have had negligible effect on operations.

“Barring any unforeseen events, we believe Imaflex is in the early stages of a multi-year growth cycle. This is an exciting time for the Corporation and its shareholders,” said Abbandonato.

Looking at the quarterly report, Shaath said revenue of $25.7 million was marginally under his $26.3 million forecast, with softening demand and an extended holiday shutdown factoring into the mix. The Q4 adjusted EBITDA of $3.3 million was in line with Shaath’s forecast at $3.4 million, with better cost controls on lower SG&A making up for the slight miss on revenue and gross profit. Reported EPS of $0.03 per share was just under the analyst’s call for $0.04 per share.

“On the organic front, the company will look to bolster its extrusion capabilities by adding 5–7-layer extruder and/or increase its conversion capacity. IFX is also considering adding such capabilities through M&A but will remain disciplined on valuation. In terms of leverage, the company sits comfortably with net-debt to EBITDA ratio of just 0.1x (vs. large- cap peers at 3.0x on average),” Shaath wrote.

Commenting on the Advaseal update, Shaath called it a negative as there was no updated timeline provided by Imaflex (compared to “around year-end 2021” as was the previous timeline).

But overall, Shaath still thinks IFX is in a great position to pursue further growth.

“We updated our model to reflect recent uptick in resin prices, now reflecting topline growth just shy of five per cent (versus negative five per cent previously) for FY22E. Management noted that demand picked up in Q1 and expects volumes to improve y/y, which we reflect in our gross profit assumptions (+2.5 per cent y/y),” he said.

“We also introduced our FY23E forecast, where we model no significant growth versus FY22E. Our FY23E forecasts make no major assumptions about the direction of resin prices and are driven by modest growth in volumes. We expect IFX to continue to generate free cash flow and bolster its balance sheet, leaving it in an exceptional position to pursue further growth initiatives (organically and/or M&A). At a current valuation of just 5.1x EV/EVITDA, IFX shares represent an excellent risk/reward trade,” he said.

By the numbers, Shaath is now calling for 2022 revenue and adjusted EBITDA of $112.5 million and $13.7 million, respectively, and for 2023 revenue and EBITDA of $113.6 million and $13.7 million, respectively. 

With the update, Shaath maintained his “Buy” rating on IFX and $1.75 per share target price, which at the time of publication represented a projected one-year return of 32 per cent.

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