AirBoss of America (TSX:BOS) is a company that can benefit from the rapid changes happening due to the COVID-19 pandemic
Capital Ideas Media | May 21, 2020 | SmallCapPower: Capital Ideas Media Publisher Mark Bunting wrote: In our pursuit of ways to make money in this turbulent, uncertain market we offer AirBoss of America (TSX:BOS) as a company that can benefit from the rapid changes happening due to the COVID-19 pandemic.
(Originally published on Capital Ideas Media on April 7, 2020)
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Here’s a description of AirBoss of America from TD Securities:
A Canada-based manufacturer of custom rubber compounds and custom rubber footwear, hand wear, gas masks and other industrials products.
BOS is the exclusive supplier of Chemical, Biological, Radiological, and Nuclear boots and gloves to the U.S. military and one of North America’s largest rubber compounders.
We’ve rarely mentioned AirBoss before except for a few analyst calls in the Morning Note and, frankly, the stock had been on a steady downward trajectory for the past few years.
But let’s look at what AirBoss can do not what it’s done.
That’s because it is now a benefactor in the fight against COVID-19 after landing its largest-ever contract with the U.S. Federal Emergency Management Agency (FEMA).
It’s a nearly $100 million deal to supply 100,000 Powered Air Purifying Respirators (PAPRs), 600,000 filters, and related accessories.
The contract is valued at $96.4 million and is to be delivered over 13 weeks beginning this quarter.
That kind of money can move the needle for a company with a market value of $240 million.
Cormark Securities, which has not conducted investment banking with AirBoss within the last 12 months, has boosted the price target on BOS to $17.75 from $12.75. The stock is trading at $10.22 as of this writing [Editor’s Note: BOS stock has surged 50% since the original Capital Ideas report on April 7 and is now trading at $15.22].
Here are excerpts from Cormark’s report:
Impact:
Positive. We view the contract with FEMA as game-changing because it nearly doubles BOS’ pro forma 2019 defence sales.
It is our understanding that other government agencies are contemplating orders for several of BOS’ products, including isopods, shelters, PAPRs, and rubber gloves & boots.
We increased our forecast to account for the FEMA order and the likelihood of replacement orders, partially offset by lower revenue in Rubber Solutions.
Commentary:
The FEMA order was driven by a lack of PAPRs available for frontline medical workers. Compared to the well-known N95 mask, PAPRs have a higher filter efficiency (99.97% vs 95.0%), are reusable, and are one-size-fits-all.
Based on our conversations with management, BOS has the manufacturing capacity to complete the entire order in Q2, as many parts are outsourced.
Although the FEMA contract is large and serviced only in one quarter, we expect incremental orders as the units are depleted during the ongoing pandemic and a new high-watermark inventory level is set by FEMA.
This is similar to BOS’ other defence contracts, and as such, we are forecasting 50% of the revenue to repeat in 2021.
Our updated forecast excludes potential orders from other government agencies for BOS’ defence products. With a looming bed shortage for older citizens, particularly in areas like New York, we believe a shelter order is likely.
Shelters are also in high demand because it allows hospitals to separate traditional emergency room patients from those related to COVID-19. In our view, a shelter order could be similar in size to the FEMA order.
On the other hand, BOS is experiencing pressure in both its Automotive and Rubber Solutions businesses.
However, its automotive plant is currently in the process of being repurposed to produce defence products, especially in the face of an influx of defence orders.
While automotive sales will decline $2.5 million/week due to three plant shutdowns, the margin on this business is close to zero.
In Rubber Solutions, its revenue attributable to passenger tires is under pressure and we estimate that this business generated ~$30 million of sales and ~$4 million of EBITDA in 2019. We have reduced our rubber solutions forecast to account for this pressure.
Investment Conclusion:
We are increasing our target to $17.75 from C$12.75 due to a higher forecast, foreign exchange and valuation multiple.
We value BOS on our sum-of-parts valuation multiple of 7.7x EV/EBITDA, which is a discount to BOS’ historic average and comps.
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