Shares of commercial laundry company K-Bro Linen Inc. (KBL-T) are soaring after the company announced a contract win out of Alberta that prompted some analysts to increase their target prices.
The stock hit a five-year high of $47.22 in Thursday trading after the Edmonton-based company said it was selected from a competitive bid process to provide laundry services for Alberta Health Services (AHS) that cover the entire province.
The company said the terms of the agreement were still under negotiation, but analysts say the contract will provide a revenue boost for the company, which is the largest operator of laundry- and linen-processing facilities in Canada, serving mainly the health care and hospitality industries.
The stock was halted before the news was announced on Tuesday and trading resumed Wednesday, when it rose more than 10 per cent. The stock was up another 5 per cent in early trading on Thursday. The shares have risen by about 70 per cent over the past year and fully recovered from the market sell-off last spring. K-Bro Linen shares have yet to catch up to their all-time high of $56.99 reached in June, 2015.
Stifel GMP analyst Justin Keywood has a “buy” recommendation on the stock and increased his target to $56 from $49 after the contract win was announced this week.
“I am very constructive on the name,” Mr. Keywood said in an e-mail to The Globe and Mail. “The win also solidifies K-Bro’s national network in Canada, where it will now service 100 per cent of health care volume in Alberta, Saskatchewan and most of Vancouver, along with [about] 50 per cent in Ontario.”
Mr. Keywood said a national network calls for higher multiples, “in part for the prospects of greater takeout premiums as compared to regional operators.”
And while the contract details aren’t final, he estimates an incremental revenue bump of about $10-million to $15-million annually. Also, he notes K-Bro Linen has the plant infrastructure and capacity in place to take on the new volume.
“We see K-Bro as emerging from the pandemic as much stronger, with a solid management team that navigated significant headwinds to the business,” Mr. Keywood said in a note to clients. “New opportunities arose in long-term care and for reusable PPE [personal protective equipment] with pent-up torque on the hospitality side as hotel occupancy recovers.”
Raymond James analyst Michael Glen increased his target price to $53 from $46 and maintained his “outperform” rating. He estimates volumes from the contract will start in early 2022 with the full impact – which he estimates to be about $17.5-million annually – to be included in the company’s 2023 financial results.
K-Bro Linen’s 2020 revenue was $196.6-million and analysts expect it to hit $222.3-million in 2021, according to S&P Capital IQ.
Acumen Capital analyst Jim Byrne, who has a “buy” recommendation and $48 target on the stock, said the contract win also secures existing contracts with AHS, which range from one- and two-year renewals to longer-term agreements of 10 years.
“People knew they’d win this, but [the deal] removed the ‘risk’ overhang that they wouldn’t,” Mr. Byrne said in an e-mail.
TD Securities analyst Derek Lessard maintained his “buy” rating and $54 target price on the stock.
“This is a solid contract win that is expected to result in a meaningful sales boost, although details were not immediately disclosed,” he said in a note to clients.
He said the agreement removes some of the “overhang” on the shares, “although the uncertainty surrounding COVID-19 is likely the biggest reason why they have remained range-bound year-to-date.”
Mr. Lessard said he expects the shares to remain volatile in the near term “owing to K-Bro’s hospitality exposure, with government restrictions being gradually lifted,” but noted “the pressure is expected to start easing” into the second quarter of this year.
“Our long-term hospitality forecast is assuming a full recovery only by the end of 2023,” he wrote. “However, we maintain our view that K-Bro’s shares offer a compelling upside opportunity.”
National Bank Financial analyst Endri Leno said in an e-mail that he believes the stock “overreacted” to the contract news, given his estimates that it will account for about 5 per cent to 6 per cent of revenue.
Mr. Leno maintained his “sector perform” rating (similar to hold) and $42 target price on the stock, citing “concerns regarding travel/hospitality recovery .... It appears that the stock is pricing a quick recovery in travel and hospitality, but based on current developments, this is definitely not the case, particularly not for Canada given the slow vaccine rollout here, but also globally.”
K-Bro Linen is expected to release its first-quarter results on May 12. Analysts are expecting revenue of $46-million and earnings of 12 cents a share for the quarter ended March 31, compared with revenue of $57.3-million and a loss of 32 cents a share for the same period a year earlier.
The company’s largest shareholder is Montreal-based Van Berkom and Associates Inc. with a nearly 8-per-cent stake, followed by Royal Bank of Canada and Beutel Goodman & Co. Ltd., each with roughly a 4-per-cent stake, according to S&P Capital IQ.
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