Imaflex should go even higher, Beacon says

Top and bottom quarterly beats from Imaflex Inc (Imaflex Stock Quote, Charts, News, Analysts, Financials TSXV:IFX) have Beacon Securities analyst Ahmad Shaath staying bullish on the stock and company. Shaath reviewed Imaflex’s second quarter 2022 results in a client update on Tuesday, where he maintained a “Buy” rating and $1.95 per share target price, good for a projected one-year return of 39 per cent at the time of publication.

Imaflex, which specializes in the manufacture of polyethylene films for packaging and agricultural mulch films sold in the US and Canada, released its Q2 financials on Tuesday, with the stock jumping on the results.

Revenue was up 17.3 per cent year-over-year to $32.1 million, with gross profit up 24.1 per cent to $5.6 million and net income of $3.4 million compared to $2.0 million a year earlier. EBITDA was $5.1 million, up 56.5 per cent year-over-year, and diluted EPS was $0.07 per share compared to $0.04 per share for Q2 2021.

In his quarterly comments, President and CEO Joe Abbandonato said the strong results came down to the strength and diversification of Imaflex’ business model.

“[O]ur ongoing shift to higher value offerings, better positions Imaflex to meet clients’ needs, while enhancing customer loyalty and profitability. We have successfully attained close to maximum production capacity on our multi-layer lines. As such, we await delivery and installation of the major equipment purchases announced in Q2 2022. The first of three multi-layer extruders will arrive later this year. We look forward to the opportunities ahead as we continue to scale the business and further enhance our capabilities,” Abbandonato said in a press release.

Imaflex said Selling and Administrative expenses were $2.1 million compared to $1.7 million for the prior year quarter, with the increase due to new employee hires and salary increases to remain competitive. The company also reported a foreign exchange gain of $0.6 million for the Q2 in response to the appreciation of the US dollar against the CDN.

Taking into account a 14 per cent jump in share price on Tuesday, IFX is now down just three per cent over the past 12 months but up about 15 per cent year-to-date.

Commenting on the results, Shaath said the Q2 continued Imaflex’s trend of exceeding expectations on revenue and profitability. The $31.2 million topline was above Shaath’s forecast of $29.3 million, while adjusted EBITDA on a constant-currency basis of $4.5 million was also ahead of Shaath’s forecast at $3.7 million.

“The company generated cash from operations (Ex. WC movements) of $4.6 million and deployed $5.7 million of cash towards its expansion program,” Shaath wrote in his report. “This is IFX’s largest ever investment expense, a testament to the strength of the cash flow profile and balance sheet strength.”

“As a reminder, IFX ordered ancillary flexible packaging equipment as well as film metallizer. The equipment will replace aging assets as well as expand existing capabilities in IFX’s Canadian and US operations. Overall, we expect this equipment to be a meaningful net capacity add and enhance IFX’s product mix, ultimately improving the company’s gross profit and EBITDA,” he said.

Shaath noted Imaflex’s update on its ADVASEAL Registration with the US Environmental and Protection Agency, where the company has engaged an independent lab to prove the equivalence of certain ingredients coated on ADVASEAL with compounds already registered in the US. The company said “important progress” has been made on the process, with the new timeline for submission expected in the fourth quarter of this year.

Shaath said the demand environment for Imaflex’s products continues to be strong, while the company’s investment plans set it up to continue with strong top and bottom line growth as well as cash flow growth.

The analyst’s updated forecast calls for full 2022 revenue of $122.6 million and adjusted EBITDA of $15.8 million. For 2023, the forecast is for $128.4 million in revenue and $17.3 million in EBITDA. On valuation, Shaath is estimating IFX’s 2022 EV/Sales at 0.6x and 2023 EV/Sales at the same multiple of 0.6x. For EV/EBITDA, the call for 2022 is 4.8x and for 2023 at 4.4x.

“We note our forecasts do not capture the upside from the significant investment IFX is undertaking in its facilities (three extrusion lines, metalizing and bag equipment). At a current valuation of just 4.4x EV/EVITDA, IFX shares represent an excellent risk/reward trade,” Shaath wrote.