ATB ATB Capital Markets analyst Tim Monachello thinks CES Energy Solutions Corp.’s $200-million senior note issuance “ultimately secures its debt capital structure with a highly manageable debt load at attractive rates, while providing visibility to a new phase of capital allocation materially more focused on accelerating shareholder returns and strategic growth initiatives (high-return organic growth and tuck in acquisitions).”
In a research report released Monday, Mr. Monachello resumed coverage of the Calgary-based company following the close of the offering of unsecured 6.875-per-cent senior notes maturing in 2029. The proceeds, along with drawings on its senior syndicated credit facility, will be used to repay its outstanding $250-million secured floating rate Canadian Term Loan facility at more attractive terms.
“The issuance transitions CEU’s debt capital structure from 100-per-cent bank debt to roughly 70-per-cent/30-per-cent term debt/bank debt, which will essentially set a fixed baseline for gross leverage through 2029 while reducing exposure to interest rate volatility, and providing downside protection by replacing secured bank debt with covenant light unsecured term debt,” he said. “Our modeling suggests CEU will generate ample FCF to fully repay its senior syndicated facility by mid-2025, at which point we forecast CEU’s net leverage ratio will have declined to 0.6 times trailing adj. EBITDAS (1.3 times at March 31, 2024). Given CEU’s highly sustainable leverage position, we believe its term debt issuance sets the stage for its capital allocation priorities to begin pivoting away from deleveraging and toward high-return growth opportunities and accelerating returns to shareholders, with an emphasis on share repurchases.”
Mr. Monachello reiterated his EBITDA projections while making modest reductions to his free cash flow estimates (approximately 2 per cent) to reflect “increased interest payments despite materially lower effective rates, given higher absolute leverage compared to our previous modeling that contemplated bank debt repayment below the principal amount of the new $200-million senior note.”
“That said, our modeling also includes CEU’s cash balance growing to $300-million by year-end 2026 ($115-milion previously) and does not contemplate any material return on that cash either,” he added. “That said, our modelling methodology does not include share repurchases in future periods, and we believe CEU could allocate upward of $150-million per year to share repurchases which would absorb the vast majority of its accumulated cash balances and could ultimately prologue its path toward the full repayment of its bank debt.”
The analyst maintained his “outperform” recommendation and $8.25 one-year price target for CES shares. The average is $8.17.