RE: Canaccord new research note22 Apr 2024 13:23
I have managed to get hold of the new Brokers Note entitled "FY results: strong cash flow".
Key points:
1. Valuation target retains at 325p with BUY rating (currently mkt price today is only 47% of Broker price target).
2. Broker valuation rationale :
“Our target continues to be based on two arguments:
a. the multiples applicable to a mid-cap chemicals company, and;
b. the value which we believe is applicable to Itaconix's differentiated market position and which would be relevant to an industrial third party." (so Broker is considering full opp. pipeline market value/+DCF going concern value to possible acquiror). "At our 325p target the stock would trade at 5.1x/3.7x 2025E/26E EV/revenue, which we believe would be highly attractive to an industrial buyer looking at markets with gross margins in the hundreds of millions of dollars annually.”
3. More discussion of underlying customer portfolio growth WITHOUT the 'low margin' customer - Observations:
Underlying revenue growth of post loss “core” business is v. large: “Excluding the major North American detergent merchandizing customer, we understand 2023 revenue was $3.6mn, and therefore growth from other customers in 2024E (largely derisked) is c.70% for 2024. We expect this growth to be across Itaconix's end markets, in cleaning, hygiene, beauty, and in various new industrial applications. We also expect growth to continue in 2025E at above 50% y/y."
4. Cash on Balance Sheet is sufficient until after FY 2026 when ITX business transitions to op. cashflow positive
5. Manufacturing building facility lease renewal for another 10 + years (confidence?): "In December 2023, Itaconix renewed the lease on its existing building to 2034, resulting in the recognition of a c.$2mn asset and c.$2mn liability under IFRS16."
6. Possible asymmetric Broker treatment (revenues v’s plant capacity) – the capex is still quite high during 24E/25E/26E => aggregate of $4.0m (about 2x a plants worth?) and ave recent depreciation is c$0.2m. So looks like we are replacing all the plant assets plus adding another one unless there is considerable re-tooling going on. Unless I have missed something there appears to be a mismatch since when we heard in the management call the other day – a denial for any new plant at this time for the foreseeable future. I’m scratching my head a little on this and can only assume the revenue line is light or the capex line is heavy. You can DYOR on this but makes sense not to over commit to possible upside revenue and be full on the cost/capacity area so perhaps that is the theme here - forecast prudence.
7. John said on the call that there should be some "news" in the short term (RNS) for diversification wins so I expect we will know more when that disclosure is made (leather/paints)