OTCPK:CSUWF - Post by User
Post by
retiredcfon Apr 25, 2017 8:16am
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Post# 26161231
Nice Upgrade
Nice UpgradeFrom RBC; their upside scenario target is also raised to $28. GLTA
April 25, 2017
Enercare Inc.
Upgrading to OP and increasing PT to $26, as we see years of rental growth
Our view: We recently hosted meetings with John Macdonald (CEO) and Evelyn Sutherland (CFO), which gave us more comfort that the rental platform will be successfully rolled-out at Service Experts (SE). We are upgrading the shares of Enercare to Outperform and increasing our price target to $26 (from $21) to reflect our view that there will be years of growth ahead for its rental portfolio.
Key points:
We expect rentals at SE to gain traction. HVAC rentals are a relatively new concept within SE’s footprint outside of Ontario, but we believe the penetration rate will eventually grow from early indications of 10%. Approximately 38% of the HVACs sold by SE are financed by customers, making it an easier transition since rentals are similar to a long-term financing paired with a protection plan. We also believe Scott Boose, the new President and CEO of SE, is the right person to roll-out rentals, given his past role as the President of Direct Energy Services, which serviced over 1 million customers annually in the U.S. and Canada, and included rentals.
Attractive return on invested capital. Management estimates that the capital invested in water heater and HVAC rentals generates an unlevered after-tax return of 13-21%. We estimate that one dollar of value is created for every dollar of capital invested to grow the rental portfolio (i.e., $1 invested at 13-21% return is valued at $2). Management’s 2017 mid-point forecast investment into HVAC rentals is $49 million (14,500 HVAC units), up from $32 million (10,300 HVAC units) in 2015. If SE is able to achieve a 10-20% rental penetration rate in the next 2-3 years, we estimate HVAC investments would increase by approximately $20-40 million/year.
Revising estimates, but core EBITDA largely unchanged. We have increased our 2017 and 2018 ACFFO estimates to $1.76, and $1.95, respectively (from $1.30 and $1.42, respectively). The change is due to our decision to exclude HVAC rental capex from maintenance capex from 2017 onward. We included the HVAC rental capex in 2016 and prior years because it offsets (more than offsets in 2015/16) the net decline in the number of water heater rentals. However, in 2017 we expect continued improvements in the attrition rate will result in only a very marginal net reduction in water heaters, which will be offset by the higher rental rates for new water heater customers.
Increasing PT to $26. We have increased our price target to $26 (from $21) to reflect our improved confidence that the rental roll-out into the SE business will be successful. Our price target is based on 13x (previously 15x) our revised 2018 ACFFO/share, which incorporates a lower maintenance capex (see page 4 for additional details). We note that Reliance (ECI's largest competitor in Ontario) was recently acquired for ~12.5-13.0x its 2016 EBITDA, which is consistent with our new price target