TGH stock is still a buy, Beacon says

Following the company’s third quarter results, Beacon analyst Russell Stanley remains bullish on Tornado Global Hydrovacs (Tornado Global Hydrovacs Stock Quote, Chart, News, Analysts, Financials TSXV:TGH).

On November 27, TGH reported its Q3, 2023 results. The company posted Adjusted EBITDA of $2.2-million on revenue of $27.1-million, a topline that was up 77.5 per cent over the same period a year prior.

Stanley summarized the quarter.

“TGH reported Q3 revenue/adjusted EBITDA of $27.1M/$2.2M v. our forecast of $23.5M/$2.1M,” the analyst said. “Revenue beat our forecast handily, owing to stronger than expected hydrovac sales ($24.8M v. $21.9M) and Parts & Services revenue ($2.3M v. $1.6M). Revenue also improved 76% y/y and 15% q/q driven by increased sales to both key customers – Custom Truck OneSource (CTOS-NYSE, Not Rated) and Ditch Witch, a division of The Toro Company (TTC-NYSE, Not Rated), as well as other customers. The revenue beat was partially offset by softer-thanexpected gross margins (253 bps below forecast), partially offset by better/lower than expected OPEX, reducing the EBITDA margin shortfall v. forecast to 108 bps. In dollar terms, adjusted EBITDA was in line with our estimate. Operating cash flow pre-w/c was slightly stronger than expected ($1.8M v. $1.7M), with the revenue beat driving a working capital build, resulting in operating cash flow after-w/c of $1.0M v. our forecast of $2.3M despite improvements in inventory and A/R relative to sales.”

In a research update to clients November 27, Stanley maintained his “Buy” rating and price target of $1.00 on TGH, implying a return of 104 per cent at the time of publication.

The analyst thinks the company will post Adjusted EBITDA of $10-million on revenue of $101-million in fiscal 2023. He expects those numbers will improve to Adjusted EBITDA of $19-million on a topline of $125-million the following year.

“Tornado is now trading at 4.2x our F2024 EBITDA forecast,” Stanley concluded. “This represents a 39% discount to 6.8x multiple at which BDGI trades, and a 54% discount to the 9.0x at ALG trades. We continue to view ALG as the better comparable for valuation purposes given both companies focus on manufacturing, whereas BDGI is a vertically integrated service provider. Our estimates for TGH imply an EBITDA growth CAGR of 107% through F2024 v. the 18% CAGR implied by consensus estimates on ALG. Potential catalysts include M&A that expands the product suite/production capabilities, contract wins and the Q4 results. We also continue to believe that TGH would make a strong acquisition target for any company looking to add (or expand) hydrovac manufacturing capabilities.”