TOP IDEAS: A supplier to the aviation industry, IWG Technologies Inc.
(TSXV: IWG) has solid fundamentals and growth prospects but the stock is still
For over 25-years, Burnaby, BC-based International Water-Guard Industries (IWG), the main operating subsidiary of IWG Technologies Inc. (TSXV:
IWG - C$0.22) has been supplying business aircraft manufacturers with
product technology to improve the quality of on-board water systems for use by passengers and crews. With the introduction of several new products, the
strengthening of the management team and the robust business aircraft market,
the Company is beginning to generate a string of quarters with growing revenues
IWG is the world’s leading provider of flight-certified water
treatment units and specialized aircraft water system components. The Company
offers a range of products to meet all aircraft potable water systems needs,
from water treatment units including components such as pumps, on-demand water
heaters, tanks and water control systems.
IWG’s water treatment units, which use ultraviolet light
disinfection to eliminate harmful micro-organisms, are the current standard on
many high-end business jets manufactured by Gulfstream, Bomdardier, Airbus and
Boeing. The Company recently launched a new generation of on-demand water
heaters for aircraft showers and VIP galleys: the IWG (T-Series) Tank-less
Water Heater, which is lighter and smaller. IWG says the T-Series product is
the ideal water heater for future VIP aircrafts such as the Boeing 787
Dream-liner and the Airbus 350. The Company's newest product a compact water
module (IWG-M1) which pressurizes, heats and controls water flow, has been
selected for standard installations on Bombardiers’ new Challenger 350 and is
suitable for other business jet and airliner-type aircrafts.
Today’s aviation industry is growing significantly in terms of new
aircraft deliveries. The Company has said according to the General Aviation
Manufacturers Association (GAMA) and Honeywell forecasts, the medium to large,
long-range business aircraft market will continue to be the fastest-growing
sectors of the new aircraft marketplace. This market segment is where IWG sells
the majority of products. New market opportunities for the Company are with the
commercial jet manufactures whose customers are beginning to require more complex
water requirements to serve first-class and business class travellers on
long-range commercial aircrafts. In addition to aircraft original equipment
manufactures, IWG customers include aircraft completion and retrofit centres.
To take advantage of the new business opportunities, IWG hired a new
President last year, expanded its facilities, brought products to production
status and finished the development of new products for new markets. These
initiatives contributed to the Company hitting record revenue levels of C$7.4
million in fiscal 2014. Net income for fiscal 2014 was C$0.75 million ($0.02
per share) with Earnings before Interest, Taxes, Depreciation and Amortization
(EBITDA) of C$1.36 million. IWG gross margins on product sales average 50%.
The strong financial results have continued into fiscal 2015. IWG
Technologies reported sales in the first quarter of fiscal 2015 (December 31)
of about C$2 million. This was 35% higher than the same period last year. Over
80% of the Company’s sales are to customers in the United States. The EBITDA of
C$465,000 (23% of sales) more than doubled compared to last year. Fiscal Q1 has
been traditionally the Company’s weakest quarter.
Looking forward, IWG Technologies says the long-term business
outlook for the aviation sector that the Company pursues is strong and that
water issues for passengers flying on aircrafts continue to be very important.
The Company’s stated objective is to significantly grow over the next few
years. IWG Technologies has the infrastructure and a solid balance sheet to
expand its business.
The Company has been operating profitably for 10 consecutive
quarters and revenues have grown an average of 17% per year over the last four
years. As revenues continue to climb the operating leverage will lend to higher
profit growth which we feel is not reflected yet in IWG Technologies stock
price. Trailing 12-months (TTM) the Company’s shares trade less than 4.5 times
Enterprise Value (EV)/EBITDA which is inexpensive. Forward-looking to fiscal
2015, assuming sales rise 15% year-over-year (slightly below the 4-year
average) and EBITDA margins maintain 23% of sales, the shares today trade about
3.5 times EV/EBITDA. Based on the financials results 12 months back or our 12
months forward outlook, IWG Technologies stock is trading for value.
In our opinion IWG Technologies is a growth story and deserves a
stock valuation that better reflects this. Therefore we recommend that
value-driven small cap investors should begin accumulating the shares of IWG
Technologies from the current trading levels of $0.22 to a high of $0.40. At
$0.40 the valuation is about seven times EV/EBITDA based on our fiscal 2015 outlook
for the Company. We believe IWG Technologies is well-positioned to grow for at
least several more years beyond fiscal 2015. If so, our $0.40 stock price
target should be significantly exceeded over this term.
IWG Technologies is a small company but it still has a good balance
sheet with net cash holdings of $1.31 million. The Company has only nominal
amounts of short and long term debt.
The Company has approximately 38.5 million shares outstanding.
PenderFund Capital Management owns about 14% of the IWG Technologies
IWG websites: www.iwgtech.com
Author Ownership Disclosure: TSXV: IWG -
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acquired and may trade shares of IWG
Technologies Inc. through open market transactions and for investment