RBC Dominion Securities analyst Scott Robertson thinks units of Alaris Equity Partners Income Trust (
) offer upside potential of at least 75 per cent over the next 12 months.
In a research note released Monday, he initiated coverage of the Calgary-based firm, which began trading on the TSX on Sept. 4 and formerly known as Alaris Royalty Corp., with an “outperform” rating, seeing “an environment that could see above-average capital deployment.”
“We think the overall health of Alaris' portfolio is relatively strong versus historical, as: (1) the weighted-average earnings coverage ratio (or ECR, which we view as an indicator of investment health) is at a historical high (a good thing); (2) the percentage of the portfolio with very strong ECRs is at a historical high (and conversely, investments with weaker ECRs represent a historical low); and (3) Alaris is receiving more than 85 per cent of scheduled distributions from its investment partners, despite COVID-19,” said Mr. Robertson.
“Alaris has a positive investment track record, realizing a weighted-average gross portfolio IRR on returned investments of 17 per cent and, based on our analysis, is on track to achieve similar returns in its current portfolio.”
He thinks the big valuation upside is likely to stem from opportunities to deploy capital at levels higher than its historical average.
“We believe COVID-19 may have created a window for increased capital deployment opportunities pertaining to companies whose valuations may have been negatively impacted by the pandemic (making the private equity or strategic sale option less attractive), but whom are seeking significant capital to fund growth (or for other purposes) without increasing financial leverage or ceding voting control of the company,” he said. “We forecast Alaris could deploy $75-million next year, which would be in-line with its 5- and 10-year averages, resulting in a BVPU growth CAGR [book value per unit compound annual growth rate] of 7 per cent over the next 2 years, but believe that there is upside potential to this driven by these new investment opportunities.”
Mr. Robertson set a target of $17 per unit. The average target is currently $15.25.
“Alaris currently trades at 0.7 times P/BV [price to book value], below its 5-year average of 1.2 times and well below its 10-year average over 1.5 times,” he said. “We think the current unit price reflects investor concern regarding potentially significant write-downs of certain investments, perhaps in light of COVID-19.”
ALARIS EQUITY PARTNERS INCOME TRUST
10.50-1.18 (-10.10%)