AirBoss of America Corp (TSX: BOS) is a Canada based manufacturer of rubber-based products for the resource, military, automotive and industrial markets. The group is mainly operating in three segments: Rubber Compounding, Engineered Products and Corporate. 

Investment rationales

• Global Leader in CBRN Wearables: The company is the sole supplier to US Department of Defence chemical, biological, radioactive, nuclear (CBRN) boots and gloves. The company has pocketed the contracts worth USD380 million since Oct 2018.

• Solid Financial Performance: The company posted the robust number with increased consolidated sales by 36% in Q2FY20, and Gross profit as a % of sales almost doubled to 28% in the same period compared to 15.2% on Y-o-Y basis. 

• Solid order book: Subsequent to quarter-end, awarded a contract by the U.S. Department for Health and Human Services ("HHS") worth up to US$ 121.0 million for the manufacture and sale of 50,000 FlexAir™ PAPR systems, 3,000,000 filters, and related accessories. 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.

Financial Overview – 2QFY20

Source: Company

• Consolidated net sales for 2Q FY20 increased by 36.1% to USD 112.45 million, due to PAPR sales under the FEMA contract, along with the completion of the merger between the AirBoss Defense business and CSI on January 1, 2020.
• EBITDA posted by the Company in the quarter was USD 25.6 million comparing to USD 9.4 million on Y-o-Y basis.
• Net profit for the period increased to USD14.38 million from USD 3.3 million on Y-o-Y basis. Profit attributable to shareholders of the Company for this quarter was USD 6.675 million.

Segment overview of Sales

Source: Company

Dividends

The company paid a quarterly dividend of CAD 0.07 per share on July 15, 2020. Total annual dividend declared during 2019 was of CAD 0.28 per common share.

Upcoming Event

AirBoss to Release 3rd Quarter 2020 Earnings on November 10, 2020

Risk associated to investments

The Company is exposed to the price risk of concerning commodity. Commodity price risk has the potential to weigh on the earnings. This risk could impact its business, operations, and financial results.

Other risk factors involved for the Company are economic conditions, dependence on key customers, cyclical trends in the tire and automotive, and other vital industries, as well as sufficient availability of raw materials at economical costs. 

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

The improved performance was 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.

Therefore, based on the above rationale and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 18.11 on October 22, 2020. We have considered Algoma Central Corp, Badger Daylighting Ltd, and GDI Integrated Facility Services Inc etc. as the peer group for the comparison.

BOS daily technical chart. Source: Refinitiv (Thomson Reuters)

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