Post by
hawk35 on Jul 05, 2021 11:41pm
RBC Comments from May 7
Today I took some profits and invested them in Alaris. With COVID ending, this stock has so much upside potential.
The Globe and Mail article posted earlier covered the highlights. Below is RBC's comments from May 7. I did not see it posted on this board so I'm posting it now. RBC see's multiple catalysts for significant share price appreciation.
May 7, 2021
Alaris Equity Partners Income
Don’t you forget about me: Solid Q1/21 results,
increasing PT to $21, reiterating Outperform
Our view: We think Alaris has demonstrated solid fundamentals over
the last several quarters: (1) it has restarted/recouped distributions from
Body Contour Centers and restarted partial distributions from Planet
Fitness (with line-of-sight on restarting full distributions and recouping
missed distributions); (2) the company has deployed >$300MM in the
last 2 quarters, well above historical averages, and which should help
increase BVPU growth; (3) the financial health of the portfolio is very
strong vs. historical; and (4) Alaris’ common equity portfolio is starting
to show its value. We think the combination of these factors warrants a
premium valuation vs. historical, yet Alaris trades at its 5-year average P/
BV multiple of 1.1x (cue Simple Minds-themed title). We think there are
several potential near-term catalysts (e.g., Planet Fitness returning to full
distributions (July target), a successful monetization at Kimco, etc.) that
could see the stock trade higher. We bring our target up to $21/unit (was
$20) and reiterate our Outperform rating.
Key points:
Q1/21 normalized EBITDA of $28.3MM was slightly higher vs. our forecast
of $27.2MM, but in line with consensus of $28.3MM (range of $27.2MM
to $29.4MM). We note that we backed out $0.5MM of realized FX
gains from Alaris’ reported normalized EBITDA of $28.8MM. The positive
variance to our forecast was largely driven by lower-than-expected legal
& accounting fees, but also $0.4MM of common equity dividends paid by
FNC (we do not forecast common equity dividends, as it can be difficult to
predict the timing and magnitude).
Management expects at least $2MM of common equity dividends per
year going forward. As we flagged in our March 4, 2021 note, Alaris
has recently increased its exposure to common equity investments, which
could provide meaningful cash flow contribution in the future. On the
conference call, management highlighted that they have regular (but still
discretionary) dividend payers in FNC (monthly), Amur (semi-annually) and
Carey Electic (annually), noting that they could receive between $2-4MM
of common equity dividends on a regular basis, with potential upside from
others down the road. We do not include common equity distributions in
our forecasts given the uncertainty regarding the timing and magnitude,
but if we were to include management’s estimates in our forecasts, that
would increase our cash flow/unit forecasts by +$0.03-$0.07/year.
Increasing 12-month price target to $21/unit (was $20) and maintaining
Outperform rating. Our increased price target reflects a higher target
multiple (1.3x, was 1.2x). Alaris trades at 1.1x P/BV, which would be in line
with its 5-year average, but we think a higher multiple is warranted given
current fundamentals and note that Alaris’ valuation has also lagged peers
in recent months (see page 4). We think there is a strong argument for
valuation multiple expansion for Alaris over the next 12 months driven by
factors discussed in this report. We estimate that every +0.1x increase in
its P/BV multiple would increase its stock price upside by ~+6%.
We believe investors should not singularly focus on a single quarter’s financial results or necessarily how the quarter compares to prior year/prior quarter results, but rather should pay attention to trends and specifically the underlying financial trends of Alaris’ investment partners. We think this is the more prudent approach for several reasons:
· Capital deployment into new investments and/or partners returning investments do not occur on a regular cadence and thus can lead to unpredictable short-term variances in earnings, which may not reflect underlying fundamentals of the business; and
· Alaris may defer a partner or partners’ distributions from one period to the next to help alleviate short-term cash flow issues (which has been the case with Planet Fitness Growth Partners and Body Contour Centers this past year due to COVID-19), which may understate underlying fundamentals in periods where Alaris is deferring distributions and overstate in periods where those deferred distributions are made whole.
We think the best way to monitor the underlying trends of Alaris’ investment partners is to look at their earnings coverage ratios (ECR). The earnings coverage ratio refers to the normalized EBITDA of a partner divided by the sum of a partner’s debt servicing costs (interest and principal), unfunded capex and distributions to Alaris on an LTM basis. Alaris discloses
ECRs for each of its investments every quarter, which we use to help gauge the financial health of its partners. Generally speaking, an ECR >1.0x means Alaris’ partner can fund all its commitments and an ECR >1.5x has sufficient financial health, in our view. We note an ECR may decline as a partner undertakes growth initiatives (higher costs/capex), which may ultimately benefit Alaris and may not be a sign of financial deterioration.
Based on our analysis, Alaris’ weighted average ECR was 1.9x at Q1/21, which would be consistent vs. 1.9x Q/Q, but higher vs. 1.7x Y/Y (see Exhibit 2 for more details).
The percentage of the portfolio with stronger ECRs (i.e., >1.5x) continues to improve and now represents almost 80% of its portfolio (which is a historical high). Exhibit 3 highlights the percentage of Alaris’ portfolio segmented by ECR bucket (<1.0x, 1.0x – 1.5x, 1.5x – 2.0x, >2.0x) and is color-coded (red are for companies with weak earnings coverage ratios vs. on the other end of spectrum, dark green for companies with strong earnings coverage ratios).
We think Alaris’ performance/fundamentals warrant a higher valuation
When we initiated coverage last October (see our note here), we highlighted that Alaris’ portfolio seemed healthier than its valuation multiple was implying. We think that is still the case today. In each of the last 3 quarters, Alaris has continued to report solid fundamentals across its portfolio and executed on significant capital deployment. However, looking at Alaris’ valuation, it trades in line with its 5-year average (see Exhibit 4 below), yet we would argue
that fundamentals are better than they have ever been and think that Alaris should trade at a premium P/BV multiple.
Furthermore, if you look at Alaris’ U.S. BDC peers, Alaris’ valuation has lagged this group, also. Since January, Alaris has traded at a discounted valuation vs. where Alaris typically trades against this group. Looking at the closest comparable amongst the group, Main Street Capital (NYSE: MAIN; covered by RBC Capital Markets, LLC Analyst Kenneth Lee), Alaris is trading at an
~0.9x P/BV discount to this company vs. its 5-year average of ~0.5x. If Alaris were to trade inline with its 5-year average discount vs. MAIN, that would imply ~+$6.50/unit of stock price upside vs. today (and ~+$4.00/unit if Alaris were to trade in line vs. the broader U.S. BDCs peer
group).
Valuation
Our 12-month price target of $21/unit is based on applying
a 1.3x P/BV multiple to our Q1/22 BVPU forecast of $16.28.
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 $24/
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 1.4x 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 +7%), 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) return to full distributions from Planet Fitness Growth
Partners; (3) positive quarterly results; and (4) 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.
May