Scotia Never Budges - $21 Still. Hes Been right so farRating Sector Perform
1-Yr. Target C$21.00
AD.UN-T C$18.71
1-Yr. Return 19.5%
Div. (NTM) $1.35 Div. (Curr.) $1.32
Yield (Curr.) 7.1%
Valuation: Equally Weighted: 8.3% NCOA/EV Yield, 9.0x EV/EBITDA (2023E)
PERTINENT REVISIONS
New Old
CFPS from Ops21E $2.26 $2.13
CFPS from Ops22E $2.28 $2.23
New Valuation: Equally Weighted: 8.3% NCOA/EV Yield, 9.0x EV/EBITDA (2023E)
Old Valuation: Equally Weighted: 8.3% NCOA/EV Yield, 8.5x EV/EBITDA (2022E)
Management Positive On Outlook for Coming Year Despite Complex Environment
OUR TAKE: Positive. Investors reacted positively to Q3/21 results, with the stock up ~6% as management struck a positive tone on its outlook for operations and acquisitions. As we trek towards the end of what has been an impressive year for AD on a number of fronts and investor focus shifts towards 2022E and beyond, we believe the key for stock performance will be managing the health of its investment portfolio.
Global supply and labour shortages, as well as some remaining COVID-19-related disruptions, add to the already complex macroeconomic environment that faces notable inflationary and rising rate pressures. While we have increased confidence in management's ability to navigate through these challenges, we believe the complex operating backdrop is likely to further amplify investor focus on the health of AD's portfolio. The team was confident in navigating through this period given most of the investments do not rely on products to generate revenue.
We believe investors will be also focusing on capital management as a lever to drive the next phase of growth following a record year of capital deployment that could potentially create some capacity constraints to fund growth over time.
Maintaining $21.00 target price and SP rating.
Normalized EBITDA/sh of $0.74 came in roughly in line with us and the Street at $0.76, rising more than 30% y/y. NCOA/sh of $0.66 came in ahead of expectations and more than doubled over last year.
Management was positive on its capital deployment outlook for 2022E, and expects to close out the year likely with some add-on investments (which could add up to $50M) as opposed to investing in newer partners. The team does not have a clear timeline as of right now with regards to its likely Kimco redemption of US$60M to US$70M.
Although the portfolio saw the health of three investments deteriorate slightly this quarter, management expects them to tick back up, and we do not see any concerns at this point. While B&S deferred a part of its distribution, it is likely to be collected over the next six to twelve months, with no change in the company's outlook at this time. Management is anticipating top of collar resets from 10 of the investments for 2022E, which should add an additional $0.06/un of contribution to the top-line,
Exhibit 1: AD’s weighted average Earnings Coverage Ratio (ECR) remains in excess of 1.7x. Of the 19 partners, two have an ECR in the 1.0x to 1.2x range, two are in the 1.2x to 1.5x range, five are in the 1.5x to 2.0x range, and ten have an ECR greater than 2.0x. This quarter, 13 investments had no change in their ECR, three (DNT, Heritage, and Amur) experienced an increase in their ECR, while three (B&S, Edgewater, and SCR) experienced a decrease. Despite a slight dip in ECR for some of the companies, we believe the health of AD’s portfolio remains in good shape, especially with management confident these ECRs will bump back up next year. The quarter also saw Planet Fitness return to paying full distributions for the first time since Q1/20.
Exhibit 2: Q3/21 saw the continuation of an upward trend in Fair Value of Investments Per Unit. The sequential increase was largely driven by positive fair value adjustments to Kimco (US$6.5M), FNC (US$2.7M), Unify (US$1.8M), B&S (US$1.5M), and 3E (US$0.5M), offsetting a modest decline of US$0.4M in the Edgewater investment. That said, we do expect a decline in the total fair value of the investments next quarter given the redemption of FED in Q4/21.
Exhibit 3: The pace of capital deployment has been at record levels with $400M invested over the last twelve months and $260M so far in 2021, with the pipeline remaining very strong. We expect Alaris to close out by announcing some additional follow-on opportunities, which could be up to $50M, as opposed to investing in new partners. Recent redemption of FED injects additional capital to help fund investments in 2022E, with the Kimco redemption likely in 1H/21 also critical to fund further growth next year. We expect capital deployment to slow down in 2023E as the company comes up against capacity limits.
Exhibit 4: Stock is currently trading at 8.4% our NCOA/EV (NTM) Yield, a bit above its three-year average, and is also trading above its three-year average on an EV/EBITDA (NTM) basis at 9.3x. Continued demonstration of the health of its investment portfolio through a compelx operating environment and managing its capital prudently to navigate the next phase of expansion is likely to help support the next leg up in valuation
Exhibit 5: Normalized EBITDA/sh of $0.74 came in roughly in line with us and the Street at $0.76. This was up more than 30% y/y from higher revenue due to the recent capital deployment initiatives. The slight variance against our forecast was a better-than-anticipated top-line that was offset by higher-than-expected opex and finance costs. NCOA/sh of $0.66 came in ahead of expectations and more than doubled over last year.
Exhibit 6: Coming out of the quarter, we have made some changes to our estimates, which include: 1) tweaking our royalties and distributions expectations; 2) fine-tuning trajectory of opex; 3) revised f/x assumptions, and 4) pushing out the timing of the Kimco redemption to early next year. We have also introduced our 2023E forecast, with net capital deployment expected to be relatively modest at this point as AD pushes up against some capacity constraints. We are maintaining our target price at $21.00 as we rolled forward our valuation period to 2023E.