Enercare, Inc. CSUWF

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Enercare Inc.

(ECI-T) C$19.99

An Attractive Long-term Outlook, but a Little Overheated

Event

This Action Note provides an overview of our Investment Thesis on Enercare.

For additional details, please refer to the Company Bulletin available later today.

Impact: NEUTRAL

• We believe that Enercare is well-positioned for long-term success and that the recent actions taken by management, including the rental model rollout, the introduction of new products and services, and the launch of a mobile app, will ultimately result in long-term shareholder value creation.

• Based on the scenarios outlined in our Bulletin, we estimate that the embedded growth in sub-metering and the rollout of the rental model at Service Experts could result in a combined ~$2.00-3.00 per share of value creation. However, we caution that the EBITDA growth offered by these two opportunities could take longer to materialize than many investors realize.

• Despite our positive long-term view on Enercare, we have a HOLD recommendation on the company, given our near-term concerns. These include: (1) management expects the elevated level of SG&A seen in Q1/17 (~10% higher than in Q3/16 and Q4/16) to persist moving forward; (2) near-term headwinds from the rollout of the rental model at Service Experts (upfront capex and forgone upfront revenue and EBITDA, with positive EBITDA from this initiative not expected for 3-4 years); (3) potentially challenging y/y comparables (due to very warm weather experienced in Q2/16 and Q3/16); and (4) valuation.

• We have fine-tuned our estimates and raised our target price to $21.00 (from $20.00) based on 10.0x F2018E EBITDA (9.5x previously) to reflect a portion of the estimated upside in the business from embedded growth in sub-metering and the rollout of the rental model at Service Experts.

  TD Investment Conclusion

  We believe that Enercare remains an attractive long-term holding, as it is a well- run and stable company with a portfolio of rental assets that generate stable and recurring cash flows supportive of the attractive dividend and good growth opportunities. However, we have near-term concerns that lead us to advise for investor prudence, and have a HOLD recommendation on Enercare as a result