AirBoss of America Corp

AirBoss of America Corp (TSX: BOS) is a Chemicals Company based out of Canada. The Group is engaged in the business of manufacturing products based on the rubber for industrial, automotive, resource and military markets. The company’s operations are divided into three reportable segments being AirBoss Defense Group, Engineered Products and Rubber Solutions.

Q2FY20 Financial Highlights: BOS announced its quarterly results, wherein the company posted net sales of USD 112.450 million, as compared to USD 82.616 million in the previous corresponding period (pcp). The growth was driven by 50,000 FlexAir™ PAPR systems, sales under the FEMA contract, coupled with the positive impact from the merger between the AirBoss Defense business and CSI. However, the Rubber Solutions segment and Engineered Products segment showed significant slowdown as a result of the COVID-19 pandemic. The company reported a surge in the operating expenses by USD 3.075 million from the previous corresponding quarter, primarily due to inclusion of CSI operating expenses stemming from the ADG transaction, increased administrative costs and a gain from an insurance payout which was included in pcp. Adjusted EBITDA stood significantly higher at USD 25.665 million, as compared to USD 8.252 million in pcp. Net income soared to USD 14.3 million, from USD 3.3 million in Q2FY19. The growth was primarily driven by higher net sales from ADG, partially offset by weak sales within the Rubber Solutions and Engineered Products segments.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: The performance of the Rubber Solutions segment and Engineered Products segments are directly correlated with the current economic condition, such as manufacturing and industrial activities, and a lower activity would lead to a slide in sales volume.

Valuation Methodology: Price to Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The BOS stock increased ~126% so far this year. The surge in the price was primarily driven by FlexAir™ PAPR systems performance and personal protective equipment order from FEMA in the US. At the end of the second quarter, the company secured a USD 121 million order from FlexAir™ PAPRs from HHS, which is a key positive and would improve the future cash flows. AirBoss' focus on supply chain management and manufacturing capacity that supported the successful delivery of the FEMA contract is expected to pay dividends as deliveries flow through the balance of the year and into the first quarter of 2021. Securing this second large contract provided further validation for the creation of ADG, which married AirBoss' class leading CBRN protective solutions with CSI's marketing strength and strong relationships with governments and militaries around the world. This contract is expected to help further offset possible COVID-19 related weakness in the Rubber Solutions and Engineered Products businesses during the balance of 2020. The engineering segment witnessed a temporary setback due to a halt in the production process by the key customers. The company took prudent measures by temporarily laying-off hourly and salaried employees, which has lowered the variable costs of the group. The company is focusing on the installation of a new robotic work cell and is diversifying its existing product lines into sectors adjacent to the automotive space, which is impressive. However, the rubber solution business is witnessing a tepid demand due to a production halt from its premium clientele, while the recovery seems gloomy, looking at the current demand. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a low double-digit upside (in percentage terms). For the said purposes, we have considered peers like Algoma Central Corp, Chorus Aviation Inc and Park Lawn Corp. Hence, considering the aforementioned facts, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 18.57 on September 18, 2020.

BOS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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