"one of the best alternative asset classes..." Raymond James analyst Frederic Bastien thinks the Street continues to be “completely dismissing the sea change” in the fortunes of Black Diamond Group Ltd.
Accordingly, he raised his rating for the Calgary-based company to “strong buy” from “outperform” following better-than-expected second-quarter results.
“It has taken management years to transform BDI from a concentrated bet on Alberta’s oil sands to a more recurring rental business balanced across sectors and regions,” said Mr. Bastien. “And big rewards are now there for the taking, in our view. This is particularly true in today’s inflationary environment. The asset-heavy company does not operate manufacturing plants, which have universally suffered from supply chain issues and labour cost escalation. What Black Diamond has is rental capacity that can be deployed in receptive infrastructure, education and government markets at significantly higher prices. Even if rates were to stabilize at current levels, it would take until 2024 at the earliest to fully reprice BDI’s entire fleet. With this much visibility on rental rate increases, good competition for assets, continued momentum at LodgeLink, and a valuation that screens well on both an absolute and relative basis, it is time for us to turn more aggressive on the stock.”
On Aug. 4, Black Diamond reported adjusted earnings before interest, taxes, depreciation and amortization of $18.2-million, exceeding both the analyst’s $15.6-million estimate and the consensus forecast of $16.6-million.
“Strength was broad based, with both reporting segments contributing to the positive variance to our forecast. Return on assets rose four percentage points year-over-year to 17 per cent, while net debt-to-EBITDA of 2.1 times fell from 3.0 times, providing further capital deployment optionality,” said Mr. Bastien.
“BDI added 424 MSS units through a combination of organic and inorganic means, and returned $4-million to shareholders (through dividends, preferred shares redemption and share buybacks), all the while keeping its debt levels essentially intact. We believe this speaks to the strong FCF potential of modular buildings—arguably one of the best alternative asset classes most investors have never heard of.”
He raised his target for Black Diamond shares to $8 from $6.50. The average is $7.29.