Imaflex is heading higher, says Beacon

Beacon Securities analyst Ahmad Shaath says Imaflex (Imaflex Stock Quote, Chart, News, Analysts, Financials IFX:TSXV) is now flexing its balance sheet strength. The analyst has reiterated a “Buy” rating on the stock while raising his target price from $1.75/share to $1.95/share for a projected return of 47 per cent in an update to clients on Thursday.

Founded in 1994, Imaflex is a Montreal-based developer and manufacturer of flexible polyethylene films for the packaging industry and agricultural mulch films with operations in Quebec and North Carolina. Shaath’s update comes after Imaflex announced the signing of equipment purchase agreements for three new co-extrusion blown film lines.

“From a volume perspective, the three new lines represent approximately a 20 per cent expansion,” Shaath said. “However, given the multi-layer capabilities, the upside to revenues and profitability is more meaningful.”

The expanded production capacity comes with total capacity ranging between 12 million and 15 million pounds annually. The new equipment will be installed at the company’s facilities in Victoriaville, Que., and North Carolina, and will be used for three-layer and five-layer films.

The company is expecting to receive the equipment in the fourth quarter of 2022, and the installations will begin with the Victoriaville facility. The company also secured an additional equipment financing loan for a total of $10 million, bearing an interest rate of 4.89 per cent and payable in equal monthly instalments over a period of 60 months.

All told, Imaflex is expecting a timeline of 18 months for the equipment to be fully utilised from its initial commissioning date.

“In recent years Imaflex has seen consistent, profitable growth in its Canadian and U.S. operations,” commented Mr. Joe Abbandonato, President and Chief Executive Officer of Imaflex in the company’s April 21 press release. “During this time, we have been upgrading all major extrusion lines in order to meet heightening market demand for enhanced film quality, which permits our converting customers’ equipment to run at ever increasing speeds.  Simultaneously, and as forecasted, we successfully reached our goal of selling out the capacity of our higher margin 5-layer line.  Demand has been so robust on the niche products we created for this line that we recently purchased three new co-extruders.”

On Shaath’s financial projections, his 2022 revenue projection is at $112.5 million with a 15.9 per cent gross margin, but he has raised his 2023 revenue forecast from $113.6 million to $120.7 million for a potential year-over-year increase of 7.3 per cent, paired with a gross margin increase from 15.9 per cent to 16.7 per cent. From a valuation perspective, Shaath expects the company’s EV/Sales multiple to remain level at 0.6x from 2021 through 2023.

Shaath’s adjusted EBITDA projection for 2022 ticks higher from $13.7 million to $13.73 million with the margin remaining at 12.2 per cent. Looking ahead to 2023, Shaath estimates the adjusted EBITDA will grow from $13.7 million to $16 million, with the margin widening slightly to 13.3 per cent on account of the higher value, higher-margin nature of the incoming products, paired with the minimal increase in overhead costs.

In terms of valuation, Shaath believes the company’s EV/adjusted EBITDA multiple will rise slightly from the reported 4.9x in 2021 to a projected 5.1x in 2022, then dropping to a projected 4.3x in 2023.

From the investor’s view, Shaath believes the company’s fully diluted EPS will remain at $0.16/share in 2022, followed by a projected increase from $0.17/share to $0.19/share in 2023. Shaath also forecasts the company’s P/E multiple to remain at 8.3x in 2022 after reporting that figure for 2021, ahead of a forecasted drop to 7x in 2023.

Shaath said his current financial projections do not account for the full benefits of the three new lines, which he expects to ramp up in the second half of 2024 while expecting one of the lines to be fully utilized in 2023.

“As a reference, we note that IFX’s previous expansion, completed in Q4/FY19, was ~1/3rd of the volume of the new plans and helped IFX boost its EBITDA (by up to 50 per cent) and become a stable FCF generator,” Shaath said. “We are revising our target price to $1.95 (from $1.70) on the back of our new forecasts (utilizing unchanged 6.0x EV/EBITDA multiple to our FY23E forecasts). At current valuation of just 4.3x EV/EBITDA, IFX shares represent an exceptional risk/reward trade.”

Imaflex’s stock price has found some strength in 2022 with a 3.2 per cent return to this point, bouncing back from its 2022 low of $1.10/share on March 7 to hit a 2022 high of $1.37/share on April 12.