Exchange Income Corp.
(EIF-T) C$39.08
Forecast Update Event
We are updating our forecasts and target to account for share capital changes (due to the overallotment exercise on the May equity issue), updated FX, fuel price, and GDP assumptions, as well as other minor modelling updates.
Impact: NEUTRAL
We are maintaining our BUY recommendation and increasing our target to $50.00, from $48.00. The increased target price primarily reflects slightly higher EBITDA estimates in 2022 and 2023 and a change to our valuation methodology. We have adjusted our target price methodology in order to include the EBITDA contribution from Regional One in the EV/EBITDA multiple based component of our target price as opposed to valuing Regional One using a stand alone DCF (Exhibit 2). We have reduced our target EV/EBITDA multiple slightly (to 7.5x from 8.0x previously) to reflect the increased uncertainty and volatility from the inclusion of Regional One's earnings in target period EBITDA.
We believe that Exchange's performance throughout the pandemic highlights the ability of the business to support the dividend (5.8% yield) and capital expenditures without degrading the balance sheet, while maintaining the flexibility necessary to capitalize on potential acquisition opportunities. The coverage of maintenance capex and the dividend with cash from operations during one of the most challenging operating periods in history should provide confidence to the market in the normalized earnings and cash flow potential of the overall business, and be positive for long-term valuation multiples.
We believe that Exchange is one of the best-positioned, aviation-focused companies to weather the downturn, given its focus on essential domestic travel in northern communities, revenue within aviation that is less susceptible to disruptions such as surveillance, search and rescue and EMS operations, and the diversification benefits of having a large manufacturing segment that is not tied to civil aviation trends.
TD Investment Conclusion
We believe that Exchange's overall business portfolio diversification positions it to better navigate through the challenges presented by the COVID-19 pandemic than its less diversified peers. We believe that limited fixed financial obligations over the next two years provide Exchange with more flexibility to withstand the crisis and eventually resume its growth strategy.