AirBoss of America Corp

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 Automotive.

Key Highlights

• Diversified CBRN-E solutions and rubber products:The company holds a highly diversified portfolio under CBRN-E solutions and rubber products. This diversification ensured continued growth despite COVID impact resulting in a temporary effect on rubber production volume. The company is a global leader in CBRN PPE, route clearance vehicles, survivability products and the group is North America’s 2nd largest custom rubber compounder.

Source: Company

• Robust financial matrix:The Company is continuously showing a spirited performance across the revenues, gross profit, and EBITDA. On an LTM basis, the company registered a growth of 39% in revenue, 127% in the Gross margin and 146% in EBITDA, which is impressive. AirBoss Defense has been a game-changer for the company as it helped the company to post record numbers.

Source: Company

• A consistent generator of Free cash flow: The company is consistently generating free cash flows. In Q3 2020, the company generated a net free cash flow of USD 13.9 million against USD 7 million in the previous corresponding period. Also, on LTM basis, the group have generated CFO of USD 61million, making a jump of almost three times, compared to 23 million in the previous corresponding period.

Source: Company

• Strongest financial position in history: The Company expects in exiting FY2020with zero net debt, which would further enable them for potential Mergers & Acquisitions to increase growth and sustainability of EBITDA. At present, the Company has an unused operating revolving loan facility up to USD 60 million, reflecting that the Company can manage its operations from internal sources only.

Source: Company

Financial overview of Q3 2020

Source: Company 

• The Company's consolidated net sales in Q3 2020 increased to USD 162.745 million compared to USD 77.1 million in the previous corresponding period, due to PAPR sales under the FEMA and HHS contracts, supported by the completion of the merger between the AirBoss Defense business.

• In Q3 2020, Operating income increased by USD 26.3 million to USD 28.9 million, against USD 2.6 million in Q3 2019, based on low COGS and high revenues.

• COGS as a % to revenues in Q3 2020 stood at 71.9%, compared to 86.2% in the previous corresponding period.

• Net profit in the reported quarter came at USD 21.1 million, against USD 1.5 million in Q3 2019, while the profit attributable to shareholders of the company for this quarter is USD 11.6 million. 

Risk associated with investment 

The Company is exposed to a significant risk factor in commodity prices. Commodity price risk has the potential to have adverse impact on 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 & automotive and other vital industries, and sufficient availability of raw materials at economical costs.

Valuation Methodology (Illustrative): Price to Cash Flow 

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

Q3FY20 was a transformational quarter for the company as it came out with the robust performance, sales increased by 110.9%, and a healthy balance sheet with USD 43 million in cash and cash equivalents and access to approximately USD60 million in unutilized credit facilities. All these factors give a glimpse of strong foundations laid by the company. The company has acquired 100% shares of AirBoss Defense Group. This is a key positive for the group as it has already started reflecting positive results. The company targeting to exit FY2020 with zero debt on its book, which is noteworthy. Therefore, based on the above rationale and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 18.21 January 20, 2021. We have considered Chorus Aviation Inc, Badger Daylighting Ltd, Algoma Central Corp, etc. as the peer group for the comparison.

1-Year Price Chart (as on January 20^th, 2021). Source: Refinitiv (Thomson Reuters)

Slate Office REIT

Slate Office REIT (TSX: SOT.UN) is a Canadian based open-ended real estate investment trust. The company focuses on acquiring, holding, developing, maintaining, improving, leasing, managing or otherwise dealing with office properties in Canada.

• Bullish Technical indicators: The stock of SOT.UN closed at CAD 4.36, above the long-term simple moving averages (SMAs) of 100-days, 150-days and 200-days, indicating a bullish price trend. Moreover, the stock price is inching closer to the upper band of 52-weeks trading range of CAD 5.94 and CAD 2.50.             

Source: Refinitiv, Thomson Reuters

• Sequentially Improved performance: The group reported a marginal improvement in its total revenue (CAD 45.85 million versus CAD 44.60 million in Q2FY20), higher gross profit (CAD 24.84 million versus CAD 24.24 million in Q2FY20) and higher operating income (at CAD 22.62 million, improved from CAD 20.97 million in Q2FY20). Moreover, the group reported a higher net margin of 36.5%, significantly higher than 13.9% in the previous quarter. Notably, the group has lowered its total debt component to CAD 979 million, lower from CAD 987.5 million in Q2FY20.
• Strong revival in leasing activities: The company reported solid growth in the leasing activity which stood at 142,881, including new and renewal, stood significantly higher than 103,827 in Q2FY20. Moreover, in Q3FY19, total leasing activity stood below the current quarter’s performance at 124,697, which is impressive.

Source: Company Presentation

Q3FY20 Financial Highlights:

• Rental revenue posted Q3FY20 revenue of CAD 45.852 million, lower than CAD 52.539 million in the previous corresponding period (pcp). The decline was primarily due to lower operating cost recoveries and a slide in tax recoveries.

Source: Company Reports

• The quarter was marked by lower interest and finance costs of CAD 10.388 million, as compared to CAD 11.261 million in pcp coupled with a decline in property operating expenses (CAD 21.016 million versus CAD 25.152 million in pcp). However, general and administrative expense stood slightly higher at CAD 1.941 million as compared to CAD 1.931 million in pcp.
• Net income stood at CAD 16.221 million, lower than CAD 27.195 million in Q3FY19.
• The group reported a cash balance of CAD 5.290 million, while total assets stood at CAD 1,694.187 million.

Income Statement Highlights (Source: Company Reports)

Risks: The group’s revenue is dependent on occupancy rate and rent collection. Any fluctuation in these would affect the overall performance.

Valuation Methodology (Illustrative): EV to EBITDA

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock Recommendation:

The stock of SOT.UN appreciated ~16% and ~12% in the last six months and nine months, respectively, as the group reported operating margin and a net margin of 49.3% and 36.5%, respectively, significantly higher than the industry median of 27.9% and 11%, respectively. Moreover, the group has a decent track record of dividend distribution and the group carries an attractive annualized dividend yield of ~9.2%, significantly higher than the yield of TSX Composite of ~3.32%. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Boardwalk Real Estate Investment Trust, Artis Real Estate Investment Trust etc. Considering the aforesaid facts, current price movements, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 4.36 on January 20, 2021.

SOT.UN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.