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EnerCare Inc. (ECI-T) has "solid" growth prospects across all its segments, according to Desjardins Securities analyst Mark Jarvi.
"In our view, each segment (home services, Service Experts (SE) and sub-metering) has a constructive growth outlook and we believe ECI could accelerate its capital deployment (increased rental growth and/or tuck-in acquisitions)," said Mr. Jarvi, following meetings with the company's management for institutional marketing.
"[Internal rates of return] for the rental and sub-metering markets remain strong (in the mid-teens range), while ECI's cost of capital continues to improve "” this means ECI remains well-positioned to drive continued value creation for shareholders. We believe one of the most significant questions that cannot yet be fully answered revolves around the growth and evolution of the SE business"”ECI is preparing to launch rentals starting with SE's Canadian operations (representing 20 per cent of SE's EBITDA) in 4Q16 and selected U.S. states in 1Q17, but at this point we do not have a clear picture on how successful rentals might become through the SE platform. However, at current trading levels, we believe the uncertainties around SE in terms of rental potential and margin expansion are largely baked into the current share price. Overall, we believe ECI's non-promotional management can deliver on solid growth and we continue to view ECI as a strong total return (yield plus growth) story."
Mr. Jarvi said the possibility for "solid" growth across all three segments was evident throughout the meetings, which could drive both top-line growth and improved costs. He believes the home service segment can grow EnerCare's EBITDA compound annual growth rate at 4-6 per cent, the SE segment has a "reasonable" forecast of 8-10 per cent and the sub-metering and corporate segments can contribute 15-20 per cent and 4-6 per cent, respectively.
"Continued application of technology and increased cross-selling efforts are emerging as key opportunities to unlock value," he said.
He added: "Capital deployment could accelerate (financing flexibility in place), driving valuation upside. ECI has experienced favourable tailwinds in its cost of capital while still finding ways to deploy capital at attractive mid-teen IRRs. We believe capex demands could increase as [heating, ventilation and air conditioning] rentals accelerate and ECI looks to make selective tuck-in acquisitions in a fragmented HVAC industry. Increased capital deployment should drive further value creation and the capex can be covered by incremental leverage (in proportion to EBITDA growth), the potential addition of a DRIP and/or use of current financial liquidity."
Maintaining a "buy" rating for the stock, Mr. Jarvi raised his target by a loonie to $21. The analyst consensus price target is $19.70, according to Thomson Reuters.
"We view ECI as a strong total return opportunity that should deliver solid growth with an attractive (growing) dividend," he said.