Key points:
RBC hosted dinner with Exchange Income's CEO. We hosted CEO Mike Pyle for a dinner with investors in Toronto yesterday. Key highlights below:
Aviation business resilient despite macro headwinds, in our view. Key focus from the dinner was EIF's recent share price weakness, with shares down -21% YTD vs S&P/TSX up +1% (see Exh.1). We view the weakness as resulting from concerns surrounding peak passenger travel demand and the potential impact to airlines when demand normalizes. However, we see EIF's Aviation segment as more resilient versus peers and point to the segment’s revenue mix with medevac, freight, maritime surveillance, in addition to passenger, as all providing meaningful diversification. Moreover, our view is that the passenger business has a much more inelastic demand profile versus a typical airline as people traveling from Northern Communities are often doing so for essential services, such as time-sensitive / emergency medical appointments, as opposed to for leisure. We also believe recent union contracts could help source new pilots and therefore drive better utilization. All that said, we expect EIF's Aviation segment to hold up much better versus peers looking ahead.
M&A, surveillance contracts, and SkyAlyne represent upside potential to our estimates. While our estimates build in a +16% EBITDA CAGR 2022-25 on the back of recent significant contract wins, we still see upside. Specifically, we point to new opportunities with the UK government, the SkyAlyne military training contract, and potential M&A. The current contract with the UK government was a solid driver of recent results, but key is that later this year, the UK Home Office intends to release a competitive tender for a 3-year follow-on contract. As the incumbent, we view EIF as well positioned. We also note that EIF is a partner in SkyAlyne, which recently won a meaningful contract with the government of Canada for military training, and point to potential M&A, with mgmt noting the pipeline is robust, as further drivers of upside.
Insiders buying shares. Over the summer, we saw company insiders Mike Pyle (CEO), Richard Wowryk (CFO), Travis Muhr (CAO), and Gary Buckley (company director) purchase shares in Exchange Income. We note that these purchases range in price from $48 to $52, and we believe support our view that the shares are undervalued at current prices.