November 11, 2022
Alaris Equity Partners Income Trust
Strong Q3/22 results + 3% distribution increase
Our view: Q3/22 results were better than forecast and although portfolio health weakened slightly Q/Q, it is not surprising given the changing economic environment, but portfolio health still remains near historical highs. We view the units as fairly valued and while Alaris has been delivering strong financial performance, we think macro uncertainty could constrain the unit price in the near term. Maintaining Sector Perform rating and $18 price target.
Key points:
Q3/22 normalized EBITDA of $37.7MM was ahead of our $34.3MM forecast and $34.2MM consensus (range of $33.8MM to $34.7MM). Of note, we backed out $10.8MM of F/X gains, $7.1MM from investment fair value losses and $1.5M of transaction costs from Alaris’ reported EBITDA of $39.9MM. The variance from our forecast was primarily driven by higher- than-forecast distribution income and slightly lower-than-forecast SG&A expense.
Investment portfolio health declined Q/Q but remains robust, with a weighted average earnings coverage ratio (ECR) of ~2.0x (vs. ~2.1x in Q2/22) and ~73% (vs. ~80% in Q2/22) of its portfolio having an ECR >1.5x (see page 3 for more analysis on Alaris’ reported ECRs this quarter). Although portfolio health weakened slightly Q/Q, it was coming off historical highs.
Alaris expects a positive reset of +3.1% in 2023 for its portfolio, higher than our +2% forecast, which would result in $4.5MM of incremental distribution income revenue.
Alaris increased its annualized distribution +3% to $1.36/unit from $1.32/ unit.
Other takeaways: (1) Alaris is seeing more capital deployment opportunities and has a robust pipeline as higher interest rates made Alaris’ capital more attractive to companies and pace of capital deployment from private equity investors has declined due to the ongoing market volatility; (2) Alaris continues to make progress on its asset management strategy and is more confident they can make an announcement in the near future; and (3) On November 8, Alaris made a US$24MM investment in Sagamore Plumbing and Heating, LLC, of which US$20MM were for preferred shares with a 15% annualized pre-tax yield (US$3.0MM annualized distribution) and US$4MM were for a minority equity stake.
Maintaining Sector Perform rating and 12-month price target of $18/unit. Introducing 2024 forecasts.