good natured products is a screaming buy, says Beacon

It has never looked so attractive for enviro packaging company good natured products (good natured products Stock Quote, Charts, News, Analysts, Financials TSXV:GDNP), according to Beacon Securities analyst Ahmad Shaath, who reviewed the company’s latest quarterly results in an update to clients on Wednesday.

Headquartered in Vancouver, good natured makes packaging and consumer products such as bioplastic rollstock and home and organizational products, made primarily from renewable, plant-based materials without harmful chemicals. The company announced its fourth quarter 2021 and full-year financials on May 2, with Q4 revenue up 329 per cent to $22.9 million and full-ear revenue up 266 per cent to $61.1 million.

good natured called 2021 “another transformational year,” with organic revenue growth at 45 per cent, up from 22 per cent the previous year, and growth through acquisitions prominently featuring the purchase of Richmond, Illinois-based Ex-Tech Plastics, the largest acquisition in GDNP’s history and coming with an annualized revenue of US$25 million. 

“Despite challenging macro economic conditions that required consistent and disciplined management of a changing business environment and global supply chain disruptions, good natured again delivered record revenue performance in Q4 2021 and improved gross margins when compared to the third quarter,” said Paul Antoniadis, CEO, in a press release. 

The company also hit positive adjusted EBITDA for the Q4 at $0.5 million versus a loss of $0.8 million a year earlier. For the year, revenue was $61.1 million and EBITDA was a loss of $0.1 million.

Comparing with the forecast for the fourth quarter, GDNP’s $22.9 million topline was ahead of both the consensus call at $20.8 million and Shaath’s estimate at $22.0 million, while the $0.5 million in adjusted EBITDA was also a beat of the consensus of negative $0.7 million and Shaath’s negative $0.5 million.

“The [earnings] beat was a result of stronger revenues and, to a lesser extent, stronger gross margin (23.3 per cent) that topped our forecast (23.0 per cent) and was just above the midpoint of the pre-released range (22 per cent-24 per cent). The company also reported positive cash flow from operations (before working capital) of ~$400k, which is positive,” Shaath wrote.

Drilling down, Shaath said good natured’s B2B customer count continued its upward momentum with 1,200 active B2B customers at the year’s end compared to 850 at the end of the Q3. Shaath called the difference significant and said it bodes well for future organic growth given that GDNP didn’t execute any M&A transactions over the fourth quarter.

“We note that Q4/FY21 doesn’t fully reflect the impact of the US$13 million contract that GDNP signed with a US-based food retailer which was still onboarding during the quarter. Looking ahead, we feel confident that GDNP can match, if not exceed, the organic growth rate in FY22E,” Shaath wrote.

Shaath commented on GDNP’s efforts to shift acquired businesses to plant-based materials, saying the company’s core business groups are now almost 100 per cent plant-based. GDNP’s industrial business, composed mainly of commoditized extruded film, is the one holdup where Ex-Tech’s transition is still ongoing. Shaath said the delay in that case is related to continued supply chain challenges, with the transition now not expected complete by the end of the year.

Looking at Shaath’s forecast, the analyst has called for GDNP to hit revenue and EBITDA in 2022 of $102.1 million and $4.8 million, respectively, and revenue and EBITDA in 2023 of $114.1 million and $7.6 million, respectively. 

“We updated our (recently revised post Q1/FY22 preliminary results) estimates, mainly for updated SG&A estimates per the new reporting breakdown. The net impact is a downward revision to our adjusted EBITDA of about ten per cent for FY22E and FY23E,” Shaath wrote. “In our view, GDNP shares have never looked so attractive, with current valuation of just 1.6x EV/Sales (FY22E) compared to peer’s average of 4.3x. The company is poised to post a two-year revenue CAGR of ~37 per cent, with strong organic growth in FY22E that we expect to meet the company’s target of ~50 per cent.”

With the new report, Shaath has reiterated his “Buy” rating for good natured products as well as his $2.00 per share target price, which at the time of publication represented a projected one-year return of 340 per cent.

Shaath called 2022 an inflection point for GDNP’s profitability, with his expectation being for positive EBITDA on a quarterly basis. 

After a steep rise over the back end of 2020 and first two months of 2021, GDNP shares have pulled back significantly since last February, going from a high of about $1.80 to now about $0.40 per share. GDNP’s market cap currently sits at about $87 million with fully diluted shares outstanding at 262 million.