RBC Comments - Upgrade share price target to $22.00
July 29, 2021
Alaris Equity Partners Income Trust
Now that's how you supposed to drive. From now
on, that's how you drive. Increasing PT to $22
Our view: Alaris reported solid Q2/21 results and has been demonstrating
strong fundamentals (e.g., record capital deployment, record revenue/
EBITDA, historically strong earnings coverage ratios (ECRs) for investments,
partner diversification, etc.) over the last several quarters, capped off
with a +6.5% dividend increase announced this quarter. We continue
to like the setup for the stock, reflecting the following: (1) substantial
capital deployment opportunities to drive top-line growth; (2) historically
low payout ratio, (<65%), which should be supportive of continued
dividend increases; (3) historically strong investment portfolio (record
ECRs, improving diversification); and (4) an attractive valuation at 1.1x P/
BV today (vs. 5-year avg. of 1.2x and all-time avg. of 1.4x).
Key points:
Q2/21 normalized EBITDA of $31.3MM was ahead of our forecast of
$30.1MM and consensus of $29.7MM (range of $28.8MM to $30.1MM).
We note that we backed out $0.9MM of realized FX gains from Alaris’
reported normalized EBITDA of $32.2MM. The positive variance to our
forecast was driven by +$0.9MM of common equity investment dividends
received (we do not forecast common equity dividends, as it can be difficult
to predict the timing and magnitude, see page 4 of our March 5, 2021 note
for more details), but also lower-than-forecast G&A costs.
Funding not expected to be an impediment to growth over the next year.
Despite low liquidity levels (~$30MM of available credit capacity) following
a substantial capital deployment program over the past year (>$400MM
deployed), management does not feel availability of funds should be a
concern regarding future capital deployment opportunities. Management
believes there is additional room to expand their commitments from
existing lenders or potentially add new partners to the syndicate.
Interestingly, management noted they are exploring potential high-yield
issuances or even co-investment possibilities for future sources of funds.
Kimco (janitorial services) investment partly de-risked, Federal Resources
(value-added product provider) redemption looking clearer. Alaris realized
US$8MM of proceeds from Kimco this quarter and continues to expect an
additional US$60-70MM under a redemption scenario (i.e., total proceeds
unchanged vs. last quarter, just partly de-risked). Additionally, given the
progress on the Federal Resources file, the company marked-up that
investment to US$80MM (prior guidance of US$75-85MM, cost of US
$67MM) as it’s increasingly comfortable the redemption will proceed.
Another net positive distribution reset expected for 2022. Management
noted that based on current partner top-line growth trajectories, they
expect the 2022 distribution reset (net across all partners) to be positive
again this year, which could add upwards of $2MM (~1.5%) to Alaris’ top
line, which would be in line with historical averages in terms of growth.
Increasing 12-month price target to $22/unit (was $21) and maintaining
Outperform rating. Our increased target reflects higher financial forecasts.
Q2/21 results were ahead of our forecast and consensus
Q2/21 normalized EBITDA of $31.3MM was ahead of our forecast of $30.1MM and
consensus of $29.7MM (range of $28.8MM to $30.1MM). We note that we backed out
$0.9MM of realized FX gains from Alaris’ reported normalized EBITDA of $32.2MM. The
positive variance to our forecast was driven by +$0.9MM of common equity investment
dividends received (we do not forecast common equity dividends as it can be difficult to
predict the timing and magnitude), but also lower-than-forecast G&A costs.
· Cash flow available for distribution (CFAD)/unit of $0.45 was slightly ahead of our
forecast of $0.43. Excluding a -$3.1MM working capital draw down during the quarter,
CFAD/unit would have been $0.51, as in addition to the items noted above, the company
also realized lower-than-forecast finance costs this quarter.
· Book value/unit: $15.73 was right in line with our forecast. We note that Q2/21
benefitted from +$16.2MM of fair value gains this quarter vs. our forecast of $15.1MM.
· Leverage (funded debt to contracted EBITDA): 2.6x was higher Q/Q vs. 2.5x in Q1/21 as
a result of continued, strong capital deployment during the quarter (~$87MM).
Valuation
Our 12-month price target of $22/unit is based on applying
a 1.3x P/BV multiple to our Q2/22 BVPU forecast of $16.81.
Our target multiple is a premium to Alaris’s current valuation
of 1.1x P/BV and a premium to its 5-year average. We
believe Alaris’s historically strong portfolio performance,
strong capital deployment, and positive investment track
record should result in its valuation trending higher than
historical levels. Our 12-month price target and implied total
return support our Outperform rating.
Upside scenario
In our upside scenario, we think Alaris could be worth $25/
unit, which assumes Alaris continues to be active deploying
capital, resulting in increased earnings potential and increased
distributions to unitholders, which should ultimately benefit
Alaris’s valuation multiple. We assume Alaris’s valuation
multiple under this scenario is 1.5x P/BV, which would be a
premium to its 5-year average.
Investment summary
Why we rate Alaris Outperform: We think Alaris’s units offer
>30% upside potential over the next 12 months driven by:
(1) stronger BVPU growth (we forecast a 2-year BVPU growth
CAGR of +8%), in part due to an environment that could
see above-average capital deployment; (2) positive valuation
multiple re-rating (Alaris trades at 1.1x P/BV vs. our target of
1.3x); and (3) an ~8% distribution yield.
Potential catalysts: (1) significant new capital deployment;
(2) positive quarterly results; and (3) distribution increases to
unitholders.
Risks to rating and price target
Risks to our price target and rating include: (1) slow (or
negative) net capital deployment; (2) financial challenges for
Alaris’s investment partners; (3) foreign exchange risk; and (4)
key personnel departures.