Canaccord upgrades Carmanah

Experts say the plant closure and job cuts were necessary

Friday, June 27, 2008

Slashing 85 jobs and closing its manufacturing plant was a difficult decision but necessary to the financial stability of Carmanah Technologies Corp., analysts and technology experts said yesterday.

A day after the solar power and lighting company swung the hatchet on 40 per cent of its workforce and announced other sweeping changes to its distribution and sales networks, Canaccord Capital Inc. upgraded Carmanah stock from "speculative buy" to "buy" status. Canaccord also moved its target for Carmanah stock higher, from $1.70 to $2.60.

The buy rating indicates Carmanah stock -- which has languishing to penny-stock status for more than a year -- is expected to generate risk-adjusted returns of more than 10 per cent over the next 12 months.

Yesterday's markets weren't as quick to respond, with Carmanah shares (TSX:CMH) losing two cents to finish at $1.12.

"While not the easiest day for many Carmanah employees, these steps are a major win for the company's shareholders," Canaccord's Sara Elford and Jeffrey Leung said a bulletin.

Carmanah reported its first profit in a year and a half in the first quarter of this year, showing a $100,000 profit compared with a $500,000 loss at the same time last year as its restructuring started to take hold.

Last year, Carmanah posted a loss of just under $9 million.

Canaccord expects earnings per share to increase in the next two years and cash flow to improve, saying Carmanah's return on invested capital "should benefit smartly, in our view, as should the stock price."

Carmanah, one of Victoria's largest technology companies with 250 employees, said it will stop manufacturing solar lighting products at its Saanich plant by the end of the year.

The company cut 37 positions Wednesday -- 24 in Victoria and others in Calgary and Santa Cruz, Calif. -- and will reduce its local workforce by another 48 by the end of this year.

It will send manufacturing to Flextronics Inc., a Singapore-headquartered company with a factory that builds high-tech components in Calgary, where some outsourcing of Carmanah lights has been done for the last several months.

Dunnery Best of CIBC Wood Gundy in Victoria called Carmanah's move tragic for the workforce and local economy, but necessary for the company. "It's a natural progression because the company has to be competitive on a global basis," he said. "Their market is the world ... that's the market they operate in, so you can't criticize a company trying its best to adapt to a global economy."

Best said although outsourcing costs are escalating as the price of oil climbs and the cost of long-distance relationships inches higher, contracting to specialized factories is still a prudent decision for a company like Carmanah, which has struggled to streamline its product line and cut escalating operating costs.

Carmanah CEO Ted Lattimore said outsourcing production of Carmanah lights will save the company five per cent on production costs. On the surface, it doesn't seem like a lot, he said, "but if we become a $100-million company that becomes a sizable amount."

Carmanah's current market capitalization is $49.1 million.

Lattimore said the added benefits of outsourcing to Flextronics will also help to streamline the costly distribution process dictated by shipping tonnage and fuel costs.