Upgrade Seeing a “disconnect” between its valuation and outlook, National Bank Financial analyst Michael Robertson raised his recommendation for shares of CES Energy Solutions Corp. , believing “all signs pointing to a banner second quarter.”
Moving the Calgary-based company to “outperform” from “sector perform,” he said increased margin expectations “support a constructive outlook in the face of recent pressure on share prices.” CEU shares are now down 22 per cent from their 2022 peak in early June versus a 6-per-cent decline for the S&P/TSX composite index.
“On the Q1/22 results conference call, CEU noted adj. EBITDA margins exited the quarter between 12.5 per cent and 13 per cent (well above the first-quarter average of 10.6 per cent as price increases began to take hold in March),” said Mr. Robertson. “While spring breakup typically results in a sequential decline in Q2 EBITDA, given the timing of price increase implementation and a relatively brief breakup, we believe CEU will maintain the margin momentum through Q2 and could surpass the $42.5-million in adj. EBITDA generated in Q1 (well above the current consensus estimate of $40-million and potentially representative of a new high watermark for Q2).”
Alongside a higher second-quarter adjusted EBITDA forecast, Mr. Robertson increased his full-year estimate for 2022 by 9 per cent and 2023 by 13 per cent, both 4 per cent higher than the consensus on the Street, based on improved pricing and margin forecasts.”
That led him to raise his CES target to $3.50 from $3.35, viewing its “current risk/reward balance favourably.” The current average target is $3.80.
“We continue to see considerable potential upside to our target should CEU’s forward-year multiple expand to levels more in line with the longer-term historical average and current peer group average, but with multiples contracting (broadly speaking) in the current environment given concerns surrounding a broader economic slowdown, we believe a relatively conservative target multiple is more appropriate at this time,” he said.” We note our updated forecasts imply a current 2023 estimated EV/EBITDA multiple of 4.0 times based on the closing price, already below the 4.6-times forward year multiple CEU averaged during the great recession (from December 2007 to June 2009). While CEU’s forward year multiple troughed at 3.0 times during that time period (potentially suggestive of further downside from current price levels should multiples continue to contract), even in the event of a recession from a fundamental perspective we see a far more constructive macroeconomic backdrop for CEU relative to previous economic downturns (with our full-year forecasts implying record level annual EBITDA generation this year and next). With our target price implying a 50-per-cent-plus return (driven by what we view as a relatively conservative multiple) and our estimates continuing to point to an improvement in CEU’s leverage profile through our forecast period, we are moving to Outperform.”