01:21 PM EDT, 08/26/2024 (MT Newswires) -- Hammond Power Solutions announced a $20 million increase its planned capital program over two years. The company plans to expand production in Monterrey through 2025E, focusing on custom power transformers (large, higher power transformers). These transformers are typically in short supply and are widely used in C&I applications, which should lead to shorter wait times for Hammond's customers (and better margins for HPS), National Bank notes. The added capacity should also reduce bottlenecks, with an estimated $30-50 million in additional revenue potential (versus its current ~$900 million pro-forma run rate for 2025E) at a 4-5x build/EBITDA multiple, analyst Rupert Merer writes.

The announcement comes in addition to an $8 million increase approved in the first quarter, with $32 million remaining to invest from its previous expansion projects to the end of 2025E. This could be a sign of more to come should industry tailwinds remain in place. According to Merer, HPS is in a good position to grow, with $48 million in cash as of Q2, only $13 million in debt, over $50 million/yr in FCF (net of growth investments) and a small dividend ($13 million/yr). "We believe it would be comfortable at $175-200 million in debt (~1.5x EBITDA) which should support organic growth and potential for M&A to expand its power quality product lines."

HPS is rated Outperform, with a $164 target.

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