NEW - TOP IDEAS: New contract wins in its intelligent fabrics business are adding to the expected record revenue growth, and iFabric Corp’s (TSX: IFA) shares are still trading near the Company's book value. The stock is appointed to Investorfile’s list of Top Ideas as a small cap value investment opportunity.

What started out as an intimate apparel company back in the 1990s (a division which continues to operate profitably today), the main driving force behind iFabric’s future growth and expansion is the Company’s intelligent fabrics business. This includes the development, testing and distribution of specialty textiles, as well as chemicals suitable for application to textiles on apparel that improves the safety and well-being of the wearer.

Based in Markham, Ontario, iFabric Corp.’s (TSX: IFA – C$0.55) wholly owned subsidiary, Intelligent Fabric Technologies (IFT), has exclusive worldwide distribution rights consisting of a number of proprietary chemical formulations that can be applied to textiles in order to kill bacteria and viruses, repel insects, absorb odours, repel and wick moisture, block ultraviolet light and help encourage a healthy skin environment, amongst others, the Company says. These treated textiles become finished performance apparel, medical apparel and protective products, as well as swimwear, which integrate one or more chemical enhancements in order to achieve the performance characteristics demanded by the Company’s customers and consumers.

As described by iFabric, IFT current product offerings include Protx2® (anti-microbial and anti-viral formulations), Enguard® (insect repellant technology), Dreamskin® (skin polymer), UVtx (ultraviolet light blocker), FreshTx (odour-absorbing technology), RepelTX (durable water repellant) and DryTx (moisture-wicking technology), among others. The Company anticipates that several new formulations and new generations of existing formulations will be added to its pipeline in the future.

The IFT division has two key supply centres in Asia (namely China and Taiwan) which service the Asian market. This market represents the main production region for manufactured textiles supplied to North America and internationally, and is the Company’s main market area for the distribution of intelligent textile technologies. That being said, it is also exploring production options outside of Asia, too.

These supply centres offer technical support for IFT customers regarding the integration of the IFT chemical formulations in their apparel products when they are manufactured by the customer directly. Because the parent company IFabric has textile expertise, IFT also supplies finished performance and protective apparel products (treated with one or more of its formulations) on behalf of its customer brands or under its own brands.

Today, many major brands have finished apparel which integrates one or more chemical enhancements developed by IFT. According to the Company, Under Armour, Lululemon, Walmart, Target, TUMI, The North Face, Roots, Hanes, Kohl’s and Amazon are all top customers of IFT.

According to iFabric, the technology-enhanced textile market is growing rapidly. The Company says that the Global Smart Textiles Market is projected to reach US$13.6 billion by 2027. The Global Antimicrobial Textiles Market is projected to reach US $11.5 billion by 2027 and the Global Cooling Textiles Market US$3.4 billion.

About six months ago, IFT was the beneficiary of a number of major developments. First, IFT announced the execution of a license agreement with the famous Canadian apparel brand, Roots. This license provides IFT with the right to use Roots' trademarks in connection with the manufacturing and distribution of men’s, women’s and children's swimwear to retailers and other approved distribution channels, including Roots stores. The Company says this deal will bolster revenues in its fiscal Q2 & Q3 quarters, which historically have been weaker due to some seasonality of its business.

The second major development was a new license agreement with The North Face. This agreement provides The North Face with the right to use IFT’s RepelTX and ecoPEL chemical formulations in its outdoor apparel, footwear and equipment manufactured and distributed by The North Face. The Company has said that The North Face becomes the first major customer to adopt the use of RepelTX and ecoPEL in a wide range of products.

To date, in the first nine months of fiscal 2022, the Company reported revenues of C$13.7 million, which is down somewhat from 2021. But, revenues in fiscal Q3 2022 rose 26% year-over-year to C$5.24 million, with 32% of the growth coming from the IFT business division and 19% from iFabric's legacy business division, which produces intimate apparel. About two thirds of total revenue is derived from the IFT division. Blended gross margins are around 40%. iFabric earned C$360,469 in Q3 with earnings per share of C$0.01. In Q3, adjusted EBITDA was C$536,778, representing a margin of 10% on revenues.

iFabric has good balance sheet with a strong current ratio. As of June 30, 2022 the Company had C$2.6 million in cash and an undrawn operating bank loan. We note at that time the inventory value was high at C$10.8 million. According to the Company, inventory was brought in early this year to avoid shipping issues in China and was required for confirmed customer programs for the remainder of 2022. We expect that a sizable portion of inventory will be converted into cash during the first half of fiscal 2023 and inventory levels will begin to normalize more.

iFabric’s stock price is currently trading at 52-week lows and what we believe are discounted levels, given that today’s market valuation is near the Company’s tangible book value and working capital levels. But, beyond the balance sheet, we see value, too. Recent contract wins suggest to us that revenue momentum is building inasmuch that iFabric could report record annual sales (C$20 million plus) in fiscal 2022 and beyond. Given the growth profile our forecast calls for the Company’s revenue run rate to reach C$30 million exiting fiscal 2024.

Based on historical data and improved operating leverage on the estimated higher sales levels, we forecast that the Company can earn adjusted EBITDA margins of 10% or higher on its revenues in fiscal 2023 and beyond with positive earnings-per-share.

Given that iFabric’s stock valuation is trading at its book value per share range and at Enterprise Value (EV) to Sales ratio of 0.75 (for fiscal 2022), there is tremendous value in this stock today. That said, Investorfile is recommending the purchase of the shares. We suggest that small cap investors should accumulate this stock up to a price of $0.85 from its current trading price of C$0.55. For investors who own theses shares with average cost-base of about C$0.70, they are paying a valuation less than 6.5x EV/EBITDA based our above forecast for fiscal 2024. This is still inexpensive, especially if our assumptions prove to be conservative for this growth story. We note that this stock traded as high as C$3.60 earlier in 2022. As always, investors in small cap stocks should have a minimum investment horizon of 24 months to realize the capital appreciation potential.

Not incorporated in our forecasts are several possible catalysts that may come to fruition in 2023. First, the Company is still waiting for a US Environmental Protection Agency (EPA) submission process for next-level efficacy claims for its ProTX2 anti-bacterial and anti-viral, fabric-treatment technology. Approvals by the EPA would provide IFabric with enormous new market opportunities.

In an investor presentation, the Company’s CEO had suggested that its proprietary chemical formulations have applications on alternative surfaces; therefore it is in discussions with significant manufacturers outside of the apparel market to realize these new product opportunities... thus another potential major catalyst.

Noteworthy on iFabric’s balance sheet (recorded as a current asset) is a C$4.73 million prepaid expense and deposit which is subject to dispute claim for non-delivery of a textile product by a China-based supplier. While Company Management still feels it will recover some or all such funds, we have not included this amount in our valuation calculations and thus in our opinion it maybe deemed a write-off on future audited statements. On a positive note, the book value amount on iFabric’s balance sheet may significantly understate the true market value of the Company’s warehouse property it owns in Markham, Ontario.

We note that iFabric’s CEO has 35 years of experience in the textile market and the President of the Intelligent Fabric Technologies division has been with the Company for over 15 years. Combined, Management owns 64% of the Company’s outstanding shares and iFabric’s CEO is by far the largest shareholder.

Last reported, iFabric has about 29.8 million shares outstanding and 34.4 million on a fully diluted basis. The most recent public filings indicate most of all the option and warrant strike prices are significantly out-of-the-money and, therefore, are currently anti-dilutive for our valuation calculations.

iFabric Corp. website: www.ifabriccorp.com

Author Ownership Disclosure: TSX: IFA – Yes