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DIRTT Environmental keeps Buy rating with iA Capital

New quarterly numbers have iA Capital Markets analyst Neil Linsdell continuing to be on board with DIRTT Environmental (DIRTT Environmental Stock Quote, Charts, News, Analysts, Financials TSX:DRT), the sustainable interior construction company whose share price has been in free fall over the past 12 months. Linsdell updated clients on DIRTT in a Friday report where he maintained both a “Buy” rating and C$1.85 target price on the stock. At press time, Linsdell’s target represented a projected one-year return of 43.4 per cent.

DIRTT Environmental, which stands for “Doing It Right This Time,” offers environmental solutions using its proprietary ICE software for the design, manufacturing and installation of custom pre-fabricated interiors. The company went through some C-Suite changes over the first half of the year, including the stepping down of its CEO, Chief Commercial Officer and a number of Board members. Last month, DRT announced Benjamin Urban as new CEO.

DIRTT released its second quarter 2022 results on July 27, with the company saying business has been improving markedly this year and it has increased its workforce in response to higher demand. DIRTT said its forward pipeline increased by 13 per cent over the Q2 to $359 million. Revenue for the second quarter was also up about nine per cent year-over-year. (All figures in US dollars except where noted otherwise.)

“The increased activity levels and growth, particularly in the commercial sector, that began late in the first quarter of 2022 are continuing. As a result, second quarter revenues of $44.7 million were within the expected guidance range and represented an increase of 16.8 per cent and 8.8 per cent over the first quarter of 2022 and the second quarter of 2021, respectively,” said Urban in a press release.

“With demand continuing to increase, our immediate focus is to unlock manufacturing capacity, continue to improve revenues and profitability while accelerating our near-term progress towards breakeven and ultimately long-term profitability,” he said.

Linsdell said DIRTT’s Q2 show a company building momentum into the second half of the year. By the numbers, DIRTT’s topline of $44.7 million came in above both Linsdell’s estimate at $43.4 million as well as the consensus call for $43.2 million, while adjusted EBITDA was a loss of $9.4 million compared to Linsdell’s estimate at negative $6.8 million and the Street’s negative $6.6 million. The analyst said DRT’s adjusted gross margin at 18.9 per cent was down from 27.4 per cent a year ago due to a rise in costs of materials, transportation and packaging as well as pressure on wages.

Linsdell said the short-term outlook for DIRTT should see a rise in revenue attributed to rising planning activities especially in the commercial sector, while the company’s profitability should recover due to cost-cutting initiatives and price optimization. More long term, Linsdell sees DIRTT’s eco-friendly offerings as likely to grow in market share. 

“Following recent changes to management and the Board, we see the Company as well positioned to capitalize on a growing opportunity in the interior construction industry for sustainable solutions requiring less labour to install, with more price certainty and dependable timelines,” Linsdell wrote.

“Q2 results showed a growing topline, with an increasing opportunity pipeline. Although profitability has suffered recently, partly on one-time events, we do see how price increases and restructuring efforts over the last few quarters should lead to significant improvements through the end of 2022. We remain confident in maintaining our Buy recommendation,” he said.

Breaking down the quarter, Linsdell said DRT’s Commercial business improved by 56 per cent year-over-year to $29.6 million, Healthcare fell by 64 per cent to $5.1 million, Education grew by 26 per cent to $3.1 million and Government rose by 19 per cent to $5.0 million.

Looking ahead, Linsdell is calling for DIRTT to finish 2022 with revenue and adjusted EBITDA of $180.8 million and negative $27.4 million, respectively, versus 2021’s revenue and EBITDA of $147.6 million and negative $41.3 million, respectively. Linsdell then sees those numbers rise to $239.9 million ad $298.5 million in revenue in 2023 and 2024, respectively, and $9.2 million and $27.2 million in 2023 and 2024 EBITDA.

In our view, DIRTT has good client diversification, with exposure to multiple sectors. The commercial vertical is more sensitive to workplace changes and the overall economic climate, while healthcare, education and government are more defensive regardless of economic conditions,” Linsdell wrote.

“We expect to see continuous year-over-year improvements, as the Company continues to improve capacity and efficiency to meet an increase in commercial demand. With minor revisions to our model, our target price remains unchanged at C$1.85, using an EV/EBITDA multiple at 8.0x on our adjusted Q3/23-Q2/24 estimates,” he said.

Over the past 12 months, DIRTT Environmental’s share price is down about 77 per cent.

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