IMAFLEX has a 67 per cent runway, Beacon says

Strong top and bottom quarterly numbers have Beacon Securities analyst Ahmad Shaath staying bullish on IMAFLEX (IMAFLEX Stock Quote, Chart, News, Analysts, Financials IFX:TSXV), as Shaath reiterated his “Buy” rating and $1.95/share target price for a projected return of 67 per cent in an update to clients on May 25.

Montreal-based IMAFLEX develops and manufactures flexible polyethylene films for the packaging industry and agricultural mulch films, with operations in Quebec and North Carolina.

Shaath’s update comes after IMAFLEX released its first quarter financial results for the 2022 fiscal year, which Shaath noted to be ahead of expectations.

IMAFLEX’s financial quarter was headlined by revenue of $31.1 million for a 25 per cent year-over-year increase, while also producing a significant beat in relation to the Beacon Securities projection of $25.7 million on account of pricing and volume.

Meanwhile, IMAFLEX reported adjusted EBITDA of $3.8 million for a margin of 12.3 per cent, again outpacing the Beacon Securities estimate of $3.1 million and a 12.1 per cent margin, with the strong revenue helping to drive the beat while offsetting increased SG&A expenses.

The company also reported a beat on gross profit at $4.8 million compared to the Beacon estimate of $4 million, though the overall revenue beat meant the gross margin of 15.4 per cent was slightly below the Beacon target of 15.8 per cent.

Overall, IMAFLEX ended the quarter with $7.4 million in cash available for a 12 per cent sequential decrease, which was attributable to the company paying down $1.5 million on its working capital line while also making a $2 million investment in new extrusion equipment.

“The positive momentum seen over the last two years continued into the first quarter of 2022, with IMAFLEX reporting solid year-over-year increases in revenues and net income,” said Joe Abbandonato, President and Chief Executive Officer of IMAFLEX in the company’s May 25 press release. “As we expected, overall sales volumes were up over Q4 2021, while also surpassing levels achieved in Q1 2021, with growth coming from both our Canadian and U.S. operations.”

In addition to the financial results, IMAFLEX also announced it had ordered ancillary flexible packaging equipment and film metallizer in the name of replacing aging assets and expanding existing capabilities in the company’s operations in Canada and the United States, which Shaath believes will provide a meaningful net capacity add and enhance the company’s product mix.

“These investments are on top of our major April 2022 announcement regarding the purchase of three multi-layer extruders,” Abbandonato said. “They help secure future growth at a higher contribution than historical norms.”

Following the release of the quarterly results, IMAFLEX also announced it had granted a total of 300,000 stock options to a corporation employee and a member of its board of directors, which can be exercised in a five-year window at $1.19/share. One quarter of the options vest immediately upon grant, with an additional quarter vesting every six-month period thereafter.

The company’s quarterly success has prompted Shaath to revise his financial projections, increasing his 2022 revenue target from $112.5 million to $119.7 million for a potential year-over-year increase of 11.3 per cent. Looking ahead to 2023, Shaath raised his revenue expectation from $120.7 million to $128.4 million, suggesting a year-over-year increase of 7.3 per cent.

In terms of valuation, Shaath expects the company’s EV/Sales multiple to be fairly steady at 0.5x for both 2022 and 2023.

Shaath also raised his adjusted EBITDA forecast for 2022 from $13.7 million and a 12.2 per cent margin to $15.1 million and a 12.6 per cent margin, while his 2023 projection increased from $16.1 million and a 13.3 per cent margin to a revised forecast of $16.8 million, though the margin would be reduced to 13 per cent.

From a valuation perspective, Shaath forecasts the company’s EV/EBITDA multiple to drop from the reported 4.4x in 2021 to a projected 4.1x in 2023, then to a projected 3.8x in 2023.

Shaath also forecasts a slight compression in gross margin for 2022 from 15.9 per cent to 15.5 per cent, along with a projected 2023 compression from 16.7 per cent to 16 per cent.

Overall, Shaath continues to look favourably upon IMAFLEX as an extremely cheap valuation option.

“We updated our model to reflect (yet another) increase in resin prices and improved outlook on profitability, driven by improved ability to pass through cost increases,” Shaath said. “The demand environment continues to be strong and IFX’s investment plans set it up to continue to deliver strong topline, profitability and CF growth.”

IMAFLEX has endured a somewhat volatile year in the market, resulting in a 5.6 per cent loss for 2022 to date. After starting the year trading at $1.25/share, the stock dropped as low as $1.10/share on March 7, then rose to a 2022 high of $1.37/share on April 12 before dropping off by 11.3 per cent since April 29.