Unlimited Potential for Carmanah

Friday, May 21, 2004
Investor's Digest

Investor's Digest of Canada
May 21, 2004

Carmanah Technologies Corp. (CMH-TSX VEN, $3, 604-629-0264, www.carmanah.com) reported its first-quarter 2004 financial results on April 19. On the whole, they modestly exceeded our expectations.

Revenue increased 115 per cent to $4.1 million, producing positive earnings per share of $0.01 (compared with break-even earnings per share in the year-earlier quarter). We were forecasting first-quarter revenue of $3. 7 million and break-even EPS.

The increase in revenue reflects three things: continued growth in its marine, aviation and roadway markets; the early success of Carmanah's solar-powered lighting for bus stops and bus shelters in the transit market; and the acquisition of AAVA in fourth-quarter 2003.

We continue to expect the company's diversification strategy to bear fruit in the quarters and years ahead. There is certainly no shortage of applications and end markets for Carmanah's technology. The company's gross margin strengthened on a sequential basis, from 47.4 per cent to 52.7 percent. All other cost items were well contained and, on the whole, grew at a slower rate than revenue.

As a result, Carmanah generated a net margin of nine per cent (albeit at an effective tax rate of zero), the highest in its history. We expect this trend to continue through fiscal 2004 and 2005 - in fact, this is a key assumption embedded in our financial model.

Carmanah had cash and equivalents of $6.3 million at the end of the quarter, working capital of $9.8 million and negligible long-term debt. During the quarter, the company raised $5.7 million through a bought-deal private placement (note that Canaccord was the underwriter for this financing). Carmanah is still in the very early stages of its long-term growth curve.

The potential for its solar�powered LED (light-emitting diode) lights is becoming increasingly clear, as the company has identified and entered new end markets with almost immediate momentum.

Early stages of growth

The aviation market is a prime example of this, where, in the first 49 days of fiscal 2004, Carmanah secured orders valued at $ 1.1 million. The company first entered the aviation market in 2003.

For 2004, we still expect Car�manah's revenue to double to $18.5 million - driven by the inclusion of AVVA for the full year and continued growth in all of the company's end markets.

The first-quarter results suggest the company is on track to meet - if not exceed - our forecast, as the momentum in each of its target markets remains strong. Also note that for Carmanah, the second half of the year is typically stronger than the first.

Our earnings per share estimates for 2004 and 2005 are unchanged at $0.06 and $0.10, respectively. Although it is still too early to tell, we think there is a reasonably high probability that our 2005 forecast will prove conservative.

Given Carmanah's long-term growth potential, our expectation that its current hyper-growth phase will continue to attract investor attention and momentum, as well as the probable upside to our 2005 forecast, we are raising our target price from $3 to $4 a share.

Our new target price translates into a price-to-earnings multiple of 40 times our existing 2005 EPS estimate. This multiple still implies a price-to-earnings growth (PEG) ratio of less than one.

We are adjusting our rating from "buy" to "speculative buy" to reflect the premium valuation implied by our new target price, and the risk that Carmanah's growth slows or is less than expected.