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Investing.com -- UBS analysts upgraded Perimeter Solutions SA (NYSE:PRM) to Buy from Neutral, citing an “attractive entry point.”
The company’s shares soared more than 12% in premarket trading Wednesday.
The firefighting products maker saw its recurring EBITDA surge by more than 70% in 2024 compared to the 2020/21 season, yet its stock declined by 30% since mid-January.
“We see this dip as a buying opportunity,” UBS analysts led by Joshua Spector said, with their $14 price target reflecting roughly 50% potential upside.
Looking ahead to 2025, UBS anticipates it to be a reset year with a “normal” fire season compared to an above-average 2024. However, they project the 2025 EBITDA base to be approximately $100 million above the previous average years.
“PRM is a leader in fire retardants used to fight wildfires,” analysts continued. “We believe recent memory of L.A. wildfires will increase the call for more ability to fight, contain, and prevent wildfires.”
“This should catalyse growth in PRM’s volumes, absent growth in acres burned, and provide more firepower to PRM’s earnings algorithm.”
The demand for fire retardants is expected to grow, with more investment in aerial drop planes, mobile bases for reloading, and preventative materials, all areas where Perimeter Solutions has offerings.
UBS is confident in the company’s ability to deliver at least low single-digit percentage volume growth, even with flat acres burned, translating to a 7-8% Fire Safety EBITDA CAGR.
The firm has hiked its "normal" EBITDA expectation for Perimeter Solutions to approximately $220 million from around $170 million a year ago, based on the company’s performance over a period of similar acres burned.
This higher base EBITDA is anticipated to lead to more free cash flow (FCF) and reduced leverage, now at about 2 times.
Beyond fire retardants, the company is expanding in the fragmented fire suppressants market with leading offerings and maintains a stable engine oil additives segment, accounting for roughly 30% of EBITDA.
UBS’s cash deployment model suggests a potential for over 10% EBITDA CAGR, which could decrease the company’s reliance on more cyclical retardants to less than 50% of EBITDA from approximately 70% today.