Alaris Equity Partners Income 5 50 convertible unsecured subordinated Debentures T.AD.DB

God Help Us All- Scotia Ups to $23 from 21

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Diversified Financials

Alaris Equity Partners Income Trust

• AD.UN-T: C$18.53
• Target: C$23.00
  Old: C$21.00
• Rating: Sector Perform

Solid Start to 2022 with Portfolio Likely Well-Positioned to Navigate the Current Environment

OUR TAKE: Positive. Overall, a relatively solid quarter with results coming in a touch ahead of expectations and the investment portfolio remaining in very good shape. The slight beat was driven by higher-than-expected royalties and distributions due to follow-on investments.

Despite an uncertain backdrop given the war in Ukraine, supply chain issues and growing threat of rising rates and inflation, management remained confident in the outlook for the health of its portfolio companies. The team believes that because many of its investments are in companies that are largely required service businesses, Alaris’ exposure to these forces is quite limited. Management also noted that the interest rate risk for its portfolio investment companies is quite minimal given their earnings coverage ratios remain at historical highs and are also under-levered.

Management is seeing fewer quality companies going out to access private equity capital, but believes it will still be able to find attractive opportunities, albeit at a slower pace than the last 12 to 18 months.

Increasing target to $23.00 but maintaining Sector Perform rating.

KEY POINTS

Q1/22 Estimated Normalized EBITDA/sh of $0.78 came in slightly above our expectations of $0.76 and the Street at $0.75. This was up 9.4% q/q and 10% y/y. Net Cash from Operating Activities per share of $0.61 came in ahead of our expectations of $0.52 and was up just under 1% q/q but down ~6% y/y. The slight beat was driven by higher-than-expected royalties and distributions due to follow-on investments made and with PFGP returning to full distributions.

Post-quarter-end, Alaris redeemed out of Kimco with gross proceeds of U$68.2M. Alaris’ investment in Kimco has generated 109% return, reflecting an unlevered IRR of more than 13% over the eight-year period. As previously announced in Q1/22, Alaris made a follow-on investment of U$65M in Body Contour Centers, bringing the total acquisition cost to U$156M.

The health of AD's portfolio remains in good shape. The company's weighted average Earnings Coverage Ratio (ECR) remains in excess of 1.75x. Of the 18 partners, one has an ECR in the 1.0x to 1.2x range, three are in the 1.2x to 1.5x range, four are in the 1.5x to 2.0x range, and ten have an ECR greater than 2.0x

• Quarterly Financials
• Yearly Financials

Historical price multiple calculations use FYE prices. All values in C$ unless otherwise indicated.
Source: FactSet; company reports; Scotiabank GBM estimates.

Qtly CFPS from Ops  (FD)	Q1	Q2	Q3	Q4	Year	Price/Cash Flow Ops
2020A	$0.72	$0.38	$0.28	$0.59	$1.98	7.6x
2021A	$0.66	$0.45	$0.66	$0.61	$2.37	7.9x
2022E	$0.61A	$0.85	$0.58	$0.61	$2.66	6.9x
2023E	$0.62	$0.64	$0.63	$0.64	$2.52	7.2x

The overall health of the portfolio continues to improve and achieved record level of ECR. AD’s weighted average Earnings Coverage Ratio (ECR) was in excess of 1.75x, with 14 partners at greater than 1.5x. Of the 18 partners (excluding Kimco), one has an ECR in the 1.0x to 1.2x range, three are in the 1.2x to 1.5x range, four are in the 1.5x to 2.0x range, and ten have an ECR greater than 2.0x. This quarter, 16 investments had no change in their ECR, one (Brown & Settle) experienced an increase in its ECR, while Stride was the only investment to experience deterioration (see Exhibit 1).

 

Exhibit 1 - Health of Overall Portfolio is in Great Shape and Continues to Improve

Source: Company reports; Scotiabank GBM.

 

Q1/22 saw the continuation of an upward trend in Fair Value of Investments per unit. The sequential increase was largely driven by the follow-on contribution in Body Contour Centers (BCC) of U$65M, as well the positive fair value adjustment made to Kimco (~$10M). This was partially offset by the U$1M partial redemption in Carey Electric (see Exhibit 2). Management noted that there has been a meaningful decrease in quality companies being available and no recognizable decrease in private markets valuation amid the current decline in public markets. The team reassured that a selective approach is followed in current market volatility with transactions only entered with partners that are able to navigate all risk factors identified.

 

Exhibit 2 - Fair Value of Investments per Units Continues Upward Trajectory

Source: Company reports; Scotiabank GBM.

 

AD is currently trading at 9.3% our NCOA/EV (NTM) yield, almost 1.2 standard deviations above its three-year average, but is trading a touch below its three-year average EV/EBITDA (NTM) of 8.9x. Continued demonstration of the health of its investment portfolio through a complex 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 (see Exhibit 3).

 

Exhibit 3 - Alaris Valuation – EV/EBITDA (NTM) and NCOA/EV (NTM) Yield

Source: Company reports; Bloomberg; Scotiabank GBM estimates.

 

Modest revisions to our estimates. We have made modest upward revisions to our forecast largely reflecting the alignment with our opex forecast with recent guidance, along with some updates to expected royalty yields from a number of partners. Our estimate revisions are summarized in Exhibit 4, and our company snapshot provides a high-level forecast summary for key metrics (see Exhibit 7).

Increasing Target to $23.00 (was $21.00) but maintaining Sector Perform rating. Reflecting our upward estimate revisions we have increased our target price. Our target price is derived from an equal weighting of a 9.5x EV/EBITDA (2023E) and 7.7% NCOA/EV Yield (2023E).

 

Exhibit 4 - Estimate Revision Summary

Source: Scotiabank GBM estimates.

 

Q1/22 results were a touch ahead of the Street and our estimates. Estimated Normalized EBITDA/sh of $0.78 came in slightly above the Street at $0.75 and our expectations of $0.76. This was up 9.4% sequentially and 10% year-over-year. Net Cash from Operating Activities per share of $0.61 came in ahead of our expectations of $0.52 and was up just under 1% q/q but down ~6% year-over-year (see Exhibit 5). The slight beat was driven by higher-than-expected royalties and distributions due to follow-on investments made and with PFGP returning to full distributions.

 

Exhibit 5 - Quarterly Summary

Source: Company reports; Scotiabank GBM.

 

Exhibit 6 - Investment Portfolio Summary

Source: Company reports; Scotiabank GBM.

 

Exhibit 7 - Company Snapshot

Source: Company Reports; Bloomberg; Scotiabank GBM estimates.