I have spent a lot of time on Dirtt. I have a small position.
The op leverage here is real and exciting, and you rightly pointed that out. But they need to increase volumes to realize the op leverage.
What do you make of them suddenly releasing guidance not only for 2024 but also for 2025?
Coming into 2024, they did not give formal guidance but said they'd be about flat revenue. But then with formal guidance and reality, they are acknowledging they will miss 2023 revenue badly. Why would they then give blow out guidance in 2025 and what credibility does it have? Suddenly, they had visibility thru 2025 when they did in not have visibility in H1'24 for that half year? Odd, to say the least. I give zero credibility to those 2025 numbers, and I do not understand why they did that. Other than this mis-step, this management team has been about as competent as I have seen for a microcap. Incredible turnaround from the cliff's edge when they took over.
Thanks for reading and commenting. I usually don't like when management teams give guidance. It seems to create lazy investors, especially if there is a large retail ownership. And I agree, it's a bit odd to do guidance now. Might have been something the large holders were asking for.
I think their focus for 2022/23 was on the business to see what volumes and profitability would be after they made some pretty big changes. Given that they had to close a facility, I'm not sure they had a clear idea of EBITDA margins. I think they can about double their top line without needing another facility, but I can't remember if that was something stated or something I inferred.
So far I am giving them the benefit of the doubt with the 2025 guidance. I guess we will have to wait and see.
I think I can add some color here. The previous management team did not invest time and effort building a multi-year pipeline. For that to happen, DIRTT would have needed to invest in designers/conversations to help customers in the earlier (planning) stages. Instead the old management team got into the pattern of "chasing deals"...i.e. selling late and selling cheap.
This management team is doing it the right way (this time) lol. They are having conversations with customers looking to build in the next 2-5 years. They have beefed up their designer team. And they are customizing projects as much as customers are wanting. Listen to the language on the conference call -- they indicated that the company's long term pipeline expanded more than the 12 month pipeline. What reduced their 2024 revenues was a order that got deferred. But, all of 2023/24, they have been building the 2025/26 pipeline -- through their existing channel partner relationships as well as integrated channels. I think because of the 2024 revenue "miss"...the company is being very conservative about 2025. If you speak with them (I imagine you have)...it sounds as though there is a chance the company runs out of capacity in the coming years. Capacity is $400 million of revenues...so something is happening here...and it's GOOD. And the 2025 guide, in my opinion, does not reflect the potential upside.
DRT trades at 5.8x assuming US$22m of EBITDA in 2025. But in reality, I think they can generate >US$50 million of EBITDA in a couple of years. That is the trade.
Thanks for commenting. I assume you mean something like a fair value target. I would say that $2.00-2.50 is reasonable without layering any major expansion or M&A.
Thanks for commenting. They haven't disclosed the specific price that they paid but when they filed the insider disclosure documents on SEDI the share price was much higher and they would have built the position at higher prices. Hope that makes sense.
Great write-up! I’m a big fan of this turnaround story. Just a heads up: the mid-point of the 2025 EBITDA guidance is about US$22m, or C$30m. That translates in an EV/EBITDA of about 5.8x. That is much lower than your estimated valuation…
Thanks Michael. I was pulling the CAD market cap and enterprise value. I need to find a better time to edit these than after my kids go to bed and I'm very tired. lol.
I have spent a lot of time on Dirtt. I have a small position.
The op leverage here is real and exciting, and you rightly pointed that out. But they need to increase volumes to realize the op leverage.
What do you make of them suddenly releasing guidance not only for 2024 but also for 2025?
Coming into 2024, they did not give formal guidance but said they'd be about flat revenue. But then with formal guidance and reality, they are acknowledging they will miss 2023 revenue badly. Why would they then give blow out guidance in 2025 and what credibility does it have? Suddenly, they had visibility thru 2025 when they did in not have visibility in H1'24 for that half year? Odd, to say the least. I give zero credibility to those 2025 numbers, and I do not understand why they did that. Other than this mis-step, this management team has been about as competent as I have seen for a microcap. Incredible turnaround from the cliff's edge when they took over.
Thanks for reading and commenting. I usually don't like when management teams give guidance. It seems to create lazy investors, especially if there is a large retail ownership. And I agree, it's a bit odd to do guidance now. Might have been something the large holders were asking for.
I think their focus for 2022/23 was on the business to see what volumes and profitability would be after they made some pretty big changes. Given that they had to close a facility, I'm not sure they had a clear idea of EBITDA margins. I think they can about double their top line without needing another facility, but I can't remember if that was something stated or something I inferred.
So far I am giving them the benefit of the doubt with the 2025 guidance. I guess we will have to wait and see.
I think I can add some color here. The previous management team did not invest time and effort building a multi-year pipeline. For that to happen, DIRTT would have needed to invest in designers/conversations to help customers in the earlier (planning) stages. Instead the old management team got into the pattern of "chasing deals"...i.e. selling late and selling cheap.
This management team is doing it the right way (this time) lol. They are having conversations with customers looking to build in the next 2-5 years. They have beefed up their designer team. And they are customizing projects as much as customers are wanting. Listen to the language on the conference call -- they indicated that the company's long term pipeline expanded more than the 12 month pipeline. What reduced their 2024 revenues was a order that got deferred. But, all of 2023/24, they have been building the 2025/26 pipeline -- through their existing channel partner relationships as well as integrated channels. I think because of the 2024 revenue "miss"...the company is being very conservative about 2025. If you speak with them (I imagine you have)...it sounds as though there is a chance the company runs out of capacity in the coming years. Capacity is $400 million of revenues...so something is happening here...and it's GOOD. And the 2025 guide, in my opinion, does not reflect the potential upside.
DRT trades at 5.8x assuming US$22m of EBITDA in 2025. But in reality, I think they can generate >US$50 million of EBITDA in a couple of years. That is the trade.
Thanks for sharing this. It's very valuable. I agree the trade is what DRT does beyond 2025.
What a detailed write-up and thanks for writing this! Is there a price target that you're looking at?
Thanks for commenting. I assume you mean something like a fair value target. I would say that $2.00-2.50 is reasonable without layering any major expansion or M&A.
Just to confirm i get it right:
The fund have a cost basis which is 3x higher than current price?
If that's the case, and they a continue to have faith in mgmt, then it feels very interesting!
Thanks
Thanks for commenting. They haven't disclosed the specific price that they paid but when they filed the insider disclosure documents on SEDI the share price was much higher and they would have built the position at higher prices. Hope that makes sense.
Great write-up! I’m a big fan of this turnaround story. Just a heads up: the mid-point of the 2025 EBITDA guidance is about US$22m, or C$30m. That translates in an EV/EBITDA of about 5.8x. That is much lower than your estimated valuation…
Thanks Michael. I was pulling the CAD market cap and enterprise value. I need to find a better time to edit these than after my kids go to bed and I'm very tired. lol.