Tecnoglass: A Clear View to Global Profits

05/20/2019 5:00 am EST

Focus: GLOBAL

Vivian Lewis

Editor and Publisher, Global Investing

I am recommending a new stock idea, Tecnoglass (TGLS), from Barranquilla, Colombia; the company makes architectural, annealed, and laminated flexible and energy-saving glass and aluminum windows and doors, suggests international investing expert Vivian Lewis, editor of the industry leading advisory, Global Investing.

It's products are distributed worldwide, used in modern commercial and residential high-rise construction around the world for curtain walls, and also increasingly in single-family residential building where growth is exceeding its own expectations at 20-25% over last year.

It also makes safety glass for automobile and boat lights rear windshields, and frames and glass for showers and baths. Its biggest market it the US where 86% of its output is sold. Its largest market in the US is Florida . It is run by members of the local Daes family.

It reported yesterday on its Q1 in US$s. Sales rose 23% to for the 8th quarter in succession to $107.2 million on which adjusted net income grew 7% to 15¢/sh. The adjustment was to remove currency effects.

Gross profits rose 19.2% EPS was nipped by 3¢ because of extraordinary one-off capital spending for the TGLS purchase of a minority stake in French Saint-Gobain's Colombian glass sub for $100 mn, the amount this firm now sells annually.

Its chief operating officer, Christian T. Daes, said that capex is “done” except for maintenance for $4-5 million annually. He was responding to the questions of a rep of Sidoti & Co., Julio Romero, who has a $13 target price for the share.

The other analyst covering it is less bullish so the average tp is $10. Romero argues that TGLS is “not an emerging market story but a US oriented company gaining [market] share via inherent structural advantages.” It is not covered by JP Morgan brokerage.

The partners will use the existing S-G Vidrio Andino plant and jointly build a new advanced float glass plant in Galapa, near Barranquilla to supply TGLS production lines. It also has a new aluminum plant coming on in mid-July. We visited the region last year, basing ourselves in historic Cartagena, also on the Caribbean side of the country.

It also has announced a new marketing alliance in the US with Schuco and is in talks with unnamed others. It expects to close this year with a third of revenues coming from US service rather than product.

TGLS sales in Latin America fell but CEO Jose Manuel Daes says they will pick up in the current quarter because the backlog is up ~$6 million to $518 million, a record for the company. Operating expenses rose only 5.4% y/y reflecting tight cost controls. Its gross margin fell to 29.8% from prior year's Q1 level of 30.7%, but this is still a very profitable business.

Since it operates in Colombian pesos for all but its client service side, it gains from lower charges for labor, local raw materials, transport, waste disposal, taxes, and energy inputs.

There has to be a reason why this stock is so cheap, and here it is. TGLS issued new shares during the quarter to pay part of the capital costs for the jv, and the impact on its share price of the secondary offering was a $3 cut from the ~$10 level at which it began the year. It raised a disappointing $36.1 million and managed to keep up with payments to France and lower its leverage to 2.2x from 2.6% at the end of last year.

Despite the good numbers yesterday, the stock did not rise on the news. TGLS predicts 2019 full year revenues at $395-415 mn, with expected adjusted cash-flow (EBITDA) up 11% at $85-94 million. It declared a dividend of 56¢/sh which will not go to those who buy today.

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