Imaflex retains Buy rating with Beacon Securities

The valuation looks “extremely cheap” on polyethylene film manufacturer Imaflex Inc (Imaflex Stock Quote, Charts, News, Analysts, Financials TSX:IFX), according to Beacon Securities analyst Ahmad Shaath, who reviewed Imaflex’s latest quarterly results in an update to clients on Thursday. Shaath maintained a “Buy” rating and $1.95 target price on IFX, saying the company missed on its third quarter top and bottom lines but surprised on margins.

Imaflex, which makes flexible packaging solutions for the industrial, agricultural and consumer markets, announced its Q3 2022 financials on Thursday, reporting revenue down 9.8 per cent to $26.6 million and a diluted EPS of $0.06 per share compared to $0.05 per share a year earlier.

In his comments, President and CEO Joe Abbandonato said the company dealt with a number of challenges over the quarter including a delay of sales to a large customer due to a request for a redesign, post full delivery, and a temporary shut down of its Montreal plant due to a COVID outbreak.

“Looking ahead, the delivery of the first of three multi-layer extruders remains on track to arrive around year-end. Furthermore, the move towards the commercialization of our next generation agricultural film has progressed, with the Corporation recently submitting the ADVASEAL HG (ADVASEAL) registration package to the U.S. Environmental Protection Agency,” Abbandonato said in a press release.

Going over the Q3 results, Shaath said the $26.6 million topline was under his forecast at $30.9 million, while adjusted EBITDA at $3.5 million (compared to $3.5 million a year earlier) was also shy of his $3.8 million forecast. The analyst noted that IFX adjusted EBITDA margin at 13.0 per cent was better than he had forecasted at 12.2 per cent, as the company had benefited from a better product mix. EPS at $0.06 per share was also ahead of Shaath’s call at $0.04 per share primarily due to foreign exchange gains.

Shaath said Imaflex is showing strong cash flow and balance sheet metrics, meanwhile, its investment programs are on track, with expectations it will receive its first of three multilayer extruders before the end of 2022, with commissioning expecting in the first quarter of 2023. The second extruder is expected also in the Q1 2023 and the third by Q3 2023.

“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. The remaining capex is ~$7.5 million, to be spent over the next three quarters,” Shaath said.

Shaath has updated his model and revised his forecasts for 2023 to also reflect the currently lower resin prices. His full 2022 calls for revenue of $115.9 million and adjusted EBITDA of $15.2 million, moving to 2023 revenue of $124.2 million and EBITDA of $17.0 million.

“We note our forecasts do not capture the upside from the significant investment IFX is undertaking in its facilities (3 extrusion lines, metalizing, and bag equipment). At a current valuation of just 3.7x EV/EVITDA, IFX shares represent an excellent risk/reward trade,” he said.

At the time of publication, Shaath’s $1.95 target represented a projected one-year return of 30 per cent.