DIRTT Environmental is a Buy, says iA Capital 

There’s more C-suite movement at DIRTT Environmental Solutions (DIRTT Environmental Solutions Stock Quote, Charts, News, Analysts, Financials TSX:DRT), as the company aims to right the ship in wait of a new captain. Looking at the current state of affairs is Neil Linsdell of iA Capital Markets, who delivered to clients a recent update on DIRTT, saying the stock is still a “Buy” and at this point the worst is likely behind the company.

Founded in 2004, DIRTT (which stands for “Doing It Right This Time”) has a 3D design platform ICE to create custom prefabricated interiors for the public and private sector markets. The company has had a number of changes at the top this year, first with then CEO Kevin O’Meara being replaced with interim CEO Todd Lillibridge in January, only to replace him with two interim co-CEOs in May. Activist investor 22NW Fund had called for the shakeup which included the ouster of a number of Board members and, as of a June 3 announcement, the departure of Chief Commercial Officer Jennifer Warawa and Chief Operating Officer and Interim co-CEO Jeffrey Calkins, leaving the other Interim co-CEO Geoff Krause at the helm for the time being. The company said it will have a new permanent CEO in place “no later than July.”

“DIRTT’s Board of Directors continues to be impressed with the energy, creativity, teamwork, and passion that exists across the organization. At the same time, we are committed to building a more streamlined, agile, and tightly integrated company that is best positioned for sustainable growth and financial performance in the future,” said Board Chair Ken Sanders in a press release.

Surveying the landscape, Linsdell said it’s expected that Krause will return to his CFO position with the company once a new leader is found and that a thorough strategy review and reinvigoration of the business is in the works. In the meantime, Linsdell said he’s confident that the existing team can manage current operations.

“Further management changes were not unexpected given how active the new Board seems to be in restructuring operations and improving the go-to-market strategy. The most significant upcoming change will be the announcement of a permanent CEO, which will likely be a relief both internally and externally following years of disruption and lacklustre performance. We remain optimistic on DIRTT’s continuing improvement as we lap some of the worst of the pandemic impacts and should see continuous year-over-year improvements,” Linsdell wrote in his June 6 update.

DIRTT’s share price has been falling since last August, with the stock now down a little over 75 per cent from its highs last summer. Currently trading between C$1.00 and C$1.50 per share, Linsdell sees upside from here, pairing a reiterated “Buy” rating with a maintained C$1.85 target price. At the time of publication, the analyst’s target represented a projected one-year return of 25.9 per cent.

DIRTT has had a rough go of it during the pandemic where remodelling offices became less of a priority for work-from-home businesses, but its operations have picked up this year. The company delivered first quarter earnings last month which showed revenue of $38.3 million compared to $29.5 million a year ago but a net loss of $23.0 million compared to a loss of $12.5 million a year earlier. For the upcoming Q2, management has guided for revenue of between $43 and $47 million and for full-year revenue of $175-$185 million. (All figures in US dollars except where noted otherwise.)

Linsdell pointed out that DIRTT also reported in the first quarter notes that its 12-month forward project pipeline was $318 million as of April 1, a five per cent increase over the previous quarter and comprised of 60 per cent commercial, 19 per cent healthcare, eight per cent education and 13 per cent government work.

“We believe that as the Company rebuilds, it will be well-positioned to capture more meaningful contracts as its offerings address client demands for more versatility and surety of costs and schedule commitments,” he said.

By his own count, Linsdell is calling for DIRTT to generate full 2022 revenue and adjusted EBITDA of $179 million and negative $26.3 million, respectively, and 2023 revenue and EBITDA of $239 million and $6.5 million, respectively. For 2024, he is estimating $292 million and $23.0 million, respectively.