November 9, 2023
Alaris Equity Partners Income Trust
Q3/23 normalized EBITDA well ahead of forecast
Our view: We have a positive view on Q3/23 results with normalized EBITDA well ahead of forecast helped by the significant common share dividend from Fleet Advantage and also the resumption of preferred distributions from LMS. Furthermore, BVPS was ahead of forecast with additional upside from material fair value gains. From a portfolio health standpoint, Alaris’ ECR showed early signs of stabilization Q/Q after declining for several quarters. We think Alaris’s larger and more diversified portfolio should help it perform better in a weaker economic environment. Due to a higher-than-forecast Q3/23 BVPS, we increase our target to $16 (was $15) and maintain our Sector Perform rating.
Key points:
Q3/23 normalized EBITDA of $43.3MM was well ahead of our $33.4MM forecast and $33.1MM consensus (range of $32.0MM to $33.4MM). Of note, we backed out $2.8MM of F/X gains; $39.6MM from investment fair value gains; and $1.7MM of transaction costs from Alaris’ reported EBITDA of $83.9MM. The positive variance was driven by the earlier-than- forecast resumption of preferred distributions from LMS and much higher- than-forecast common share dividend from the equity investment in Fleet Advantage
Investment portfolio health is showing early signs of stabilizing as Earnings Coverage Ratios (ECR’s) were flat Q/Q. Alaris’ Q3/23 weighted- average ECR was ~1.6x (vs. ~1.6x Q/Q in Q2/23) with ~36% of its portfolio having an ECR >1.5x (vs. ~36% Q/Q in Q2/23). See page 3 for more analysis on Alaris’ reported ECRs this quarter.
Other takeaways: (1) Alaris expects distribution revenue of ~$39.9MM in Q4/23 from its preferred and equity investments; (2) Alaris is now expecting a maximum negative distribution reset in 2024 for DNT (construction contractor) due to weakening homebuilding demand; and (3) Alaris saw $29.5MM ($20.5MM in equity and $8.9MM in preferred shares) in fair value gains on its investment in Fleet Advantage (fleet management) due to an improving outlook.
Increasing our 12-month target to $16/share (was $15), but maintaining our Sector Perform rating.
Conference call Thursday at 11am ET; link to webcast available on Alaris’ website.