Raymond James analyst Andrew Bradford thinks Enerflex Ltd. was a “standout unvalued stock before the accretive acquisition” of Exterran Corp. and “now it’s even more so.”
Accordingly, seeing a lack of obstacles threatening the US$735-million deal and the potential for Enerflex to “return cash to shareholders directly and meaningfully within the next 18 months, either via increased dividends or share buyback,” he raised his rating for the Calgary-based company to “strong buy” from “outperform” on Monday.
“While the combination of Enerflex and Exterran will carry more debt, and the current year’s build/growth program will consume free cash flow, once done, the free cash flow potential from the combined company will be highly attractive and difficult to ignore,” said Mr. Bradford. “The valuation is low both on its own merit and relative to close comps. .... Lastly, natural gas will almost certainly be a multi-decades-long bridge in energy transition.”
He raised his target for Enerflex shares to $14 from $12.25. The average is $11.47.
“Even prior to the deal announcement, we saw a provocative dislocation in Enerflex’s market value relative to its pure rental and service peer group,” said Mr. Bradford. “Today, we strongly suspect the market is implicitly and unintentionally ascribing negative values to both Enerflex and Exterran’s Engineered Systems/Product Sales business lines, where these values should at worst be nil. Prior to the Covid-induced downturn, these business lines had long track records of profitable operations. It’s our view they will return to profitability, and in doing so will unencumber EBITDA. From a high level, this will appear as EBITDA growth and drive value appreciation.”