Defense Demand And Leaner Manufacturing Footprint Will Support A Constructive Long Term View

Catalysts

About AirBoss of America

AirBoss of America produces rubber compounds and manufactured products, including defense equipment and rubber molded components, for a range of industrial and government customers.

What are the underlying business or industry changes driving this perspective?

• Global increases in defense spending, together with the resumption of Bandolier deliveries and work with government partners, point to a larger pipeline for AirBoss Manufactured Products defense offerings. This would directly influence segment revenue and consolidated earnings.
• The long term focus on rubber compounding as a core growth driver at AirBoss Rubber Solutions, including specialized products and a broader array of compounds, is aimed at deepening customer relationships and winning share as supply chains rebalance. This would support higher revenue and potentially better gross margins.
• Consolidating the Jessup facility into Auburn Hills and ongoing fixed cost reductions are intended to create a leaner manufacturing footprint. Any volume recovery in automotive and adjacent molded products could therefore translate more efficiently into gross profit and EBITDA margin.
• Continued investment in research and development and new product launches at AirBoss Rubber Solutions, coupled with efforts to secure and launch new accounts, positions the segment to benefit when customer volumes normalize. This would be reflected in stronger segment revenue and an uplift in gross margin percentage from current levels.
• Year to date gains in EBITDA, adjusted EBITDA and cash from operating activities, along with a reduction in net debt and lower net debt to trailing 12 month adjusted EBITDA, give the company more flexibility to fund growth programs and capacity projects. This can support future earnings and lower interest expense as leverage trends down.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming AirBoss of America's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.4% today to 4.3% in 3 years time.
• Analysts expect earnings to reach $19.0 million (and earnings per share of $0.4) by about August 2029, up from -$5.9 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 12.1x on those 2029 earnings, up from -25.6x today. This future PE is lower than the current PE for the CA Chemicals industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.4%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent softness at AirBoss Rubber Solutions, including a 5.5% revenue contraction and 7.9% volume decline in Q3 2025 with tolling volume down 43.8%, could signal a longer term reset in demand as customers adjust supply chains and tariff exposure. This would pressure segment revenue and consolidated gross margins.
• Ongoing and potentially escalating tariffs, trade restrictions and the renegotiation of CUSMA create structural uncertainty for cross border flows. If higher duties become entrenched on products shipped from Canada to the U.S., AirBoss could face sustained cost pressure or volume loss, which would weigh on revenue and net margins.
• Heavy reliance on defense programs such as the Bandolier contract, which already experienced supply chain delays and a lengthy revenue recognition cycle, exposes the company to timing risk from government shutdowns, procurement changes or contract slippage. This could create volatility in earnings and cash flow.
• Automotive related rubber molded products remain exposed to weaker original equipment manufacturer volumes linked to tariffs in the automotive sector. If this end market stays structurally weaker or shifts to alternative materials, that could limit recovery in molded product volumes and constrain segment gross profit.
• While net debt has fallen to US$82.9 million and net debt to trailing 12 month adjusted EBITDA is 2.7x, the need to keep investing in cost savings programs, growth initiatives and facility consolidation may limit how quickly leverage can fall from here. This could restrict financial flexibility if revenue or EBITDA soften again.

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Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CA$9.48 for AirBoss of America based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$11.0, and the most bearish reporting a price target of just CA$7.96.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $439.3 million, earnings will come to $19.0 million, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 7.4%.
• Given the current share price of CA$7.66, the analyst price target of CA$9.48 is 19.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.