Take a pass on Baylin Technologies, says Paradigm

Investors will need more patience on the wait-and-see project that is Baylin Technologies (Baylin Technologies Stock Quote, Charts, News, Analysts, Financials TSX:BYL), according to Daniel Rosenberg of Paradigm Capital. In a Tuesday company note, Rosenberg reviewed Baylin’s latest quarterly results and reiterated a “Hold” rating on the stock.

Founded in 1978, Toronto-headquartered Baylin Technologies is an antenna solutions provider with design and manufacturing of custom engineered antennas for mobile, wireless infrastructure and broadband devices. 

The company announced its first quarter 2023 financials on May 10, showing Q1 revenue of $25.1 million, down by 18.9 per cent year-over-year, with Baylin citing a significant reduction in orders from its primary customer in the Mobile and Network business as a factor. Gross margin was 30.5 per cent versus 26.0 per cent a year earlier, while adjusted EBITDA at $0.9 million was up from $0.2 million a year prior. The earnings lift was attributed to improving gross margins through new product sales and pricing changes along with a $0.9 million decrease in operating expenses.

In its commentary, management said the macro picture still involves supply chain issues and materials shortages, which are expected to continue to cause delays in production and delivery.

“The North American business lines continue to perform well generally but overall performance is being negatively affected by the results of our Mobile and Network business line. We continue to prioritize product mix, emphasizing products that generate higher margins and gross profit, with a view to maintaining and growing Adjusted EBITDA, even at the expense of higher revenue,” Baylin said in a press release.

Looking at the Q1 results, Rosenberg called the adjusted EBITDA steady, while gross profit at $7.7 million was under his estimate at $8.6 million. Rosenberg said Baylin’s levered balance sheet at $8.3 million in cash against $35.7 million in debt remains a significant risk. He noted a private placement expected to close on May 22 which will see principal shareholder Jeffery C. Royer owning 61.8 per cent of outstanding common shares.

“COVID impacts and supply-chain disruptions have had severe impacts on Baylin’s operations. New management has taken several positive steps to control costs, improve margins and position the company toward growth opportunities. The balance sheet remains a concern but demand across business lines is seeing meaningful improvement with a record backlog. With share prices sitting near all-time lows, we see value for investors willing to see through a turnaround that appears to be taking root,” Rosenberg wrote.

With the update, Rosenberg moved his 2023 revenue forecast from $123.3 million to $118.1 million and his 2023 adjusted EBITDA call from $3.3 million to $4.0 million. With the maintained “Hold” rating, the analyst also kept a 12-month target of $0.40 per share, which at press time represented a projected return of seven per cent.

“While we believe in the long-term turnaround of the company, there are still challenges to work through in the near term. Macro conditions remain difficult and profitable growth will take some time to take hold. We believe exiting some of its low margin and volatile businesses and redeploying funds into its higher-value areas would be a good strategic exercise for the company,” Rosenberg said.