good natured products is heading back to $1.40, Beacon says

The share price for packaging company good natured products (good natured products Stock Quote, Chart, News, Analysts, Financials TSXV:GDNP) has come down a lot over the past 12 months but Beacon Securities analyst Ahmad Shaath is staying bullish on the stock. In a recent report to clients, Shaath maintained a “Buy” rating while dropping his target price from $2/share to $1.40/share for a 12-month projected return of 208 per cent.

Vancouver-based good natured products makes a range of packaging and consumer products primarily from renewable, plant-based materials with no harmful chemicals, using various designs and grades of bioplastic rollstock sheets as well as home and business organizational products.

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

“Revenue strength in the quarter was attributed to general price increases, which GDNP was successful in applying across the industrial and packaging business groups,” Shaath said in his June 1 report. “These price increases were more than sufficient to offset cost inflation and thus help in margin recovery.”

The company’s financial quarter was headlined by $25.9 million in revenue for 228 per cent year-over-year growth, which provided a beat in relation to the consensus estimate of $24.6 million, as well as beating the Beacon target of $25 million.

The quarter also saw shifts in good natured’s revenue mix, with its industrial stream accounting for 73 per cent of the mix compared to 69 per cent in the same quarter of 2021, with packaging largely offsetting that jump as it dropped from 26 per cent to 24 per cent.

“The beat versus our forecast was a result of stronger revenues and better cost controls, with gross margin, SG&A and fulfillment/logistics costs all coming in better than we anticipated,” Shaath said.

Geographically, revenue from the United States jumped from 67 per cent in the same quarter of 2021 to 90 per cent in the most recent report.

On the margins, good natured reported record adjusted EBITDA of $1.2 million to double the $0.6 million Beacon projection and triple the $0.4 million consensus outlook, while the reported 25.6 per cent gross margin being ahead of the 25 per cent Beacon projection and closer to the 26 per cent estimate Beacon set out for the second half of 2022.

“Our Q1 2022 growth in revenue and adjusted EBITDA is the result of our collective team across North America working together to achieve an incredible outcome in very challenging macroeconomic operating conditions,” said Paul Antoniadis, Chief Executive Officer of good natured in the company’s May 31 press release. “I want to sincerely thank our team members and partners for their passionate commitment to our customers. This commitment will serve us well to capitalize on the robust demand for environmentally friendly products and the growing trend of re-shoring supply chains to North America.”

Since the release of the quarterly reports, good natured also secured $6.56 million in private funding via special placement through the sale of 16,402,500 Special Warrants at an issue price of $0.40 per Special Warrant.

The company also made moves on the M&A front in the quarter, having  entered into a definitive asset purchase agreement to acquire FormTex Plastics Corporation, a Houston-based manufacturer of plastic packaging with seven thermoforming machines in a leased facility spanning 51,000 square feet.

“The FormTex operation will act as GDNP’s packaging manufacturing hub, building on the company’s existing extrusion capacity in the US through ExTech in a similar fashion to what the company built in Canada with IPF/Shephard,” Shaath said.

However, as part of the acquisition, good natured’s lender, National Bank Financial, forced the company to refile its 2021 year-end financials and reclassify certain debt obligations to current liabilities on account of a perceived breach of their fixed charge coverage ratios, though Shaath believes the situation will be remedied to produce a shared understanding of fixed charge coverage interpretations.

Shaath forecasts the company to break into nine figures of revenue at a projected $103 million in 2022, up from the previous $102.1 million estimate, for a potential year-over-year increase of 68.6 per cent. Shaath’s growth forecast isn’t nearly as pronounced for 2023, as he maintained his $114.1 million projection for a potential year-over-year increase of 10.8 per cent.

From a valuation perspective, Shaath forecasts the company’s EV/Revenue multiple to dip to 1.6x in 2022, then projected to drop to 1.4x in 2023.

Shaath also made a slight revision to his adjusted EBITDA forecast for 2022, raising the projection from $4.8 million to $5 million for an implied margin of 4.9 per cent while maintaining his $7.6 million forecast for 2023, implying a margin of 6.7 per cent.

In terms of valuation, Shaath introduces an EV/EBITDA multiple forecast of 32.4x for 2022, which he forecasts to drop to 21.1x in 2023.

The company has steadily seen its stock price drop to a 44.8 per cent loss in 2022 and a loss of 62.1 per cent in the last 12 months. good natured began the year trading at $0.77/share, though it dropped as low as $0.37/share on May 25.