RBCMost impressive is that their upside scenario target is a whopping $33.00. GLTA
May 7, 2014
Canyon Services Group Inc.
The Frac Train Begins to Roll Again
Our view: FRC's Q1/14 results highlight the recovery is already underway
in the Canadian pressure pumping market, with full utilization for most
of Q1 driving sizable margin gains (~400 bps q/q). These results, and
management commentary that points to strong customer demand post
spring break-up backstop our bullish outlook for FRC and the Canadian
pressure pumping market as a whole. We reiterate our Outperform
recommendation.
Key points:
Price target increased to $20, up $3 (~18%). While our 2015 estimates do
not change materially, we would note our 2015 estimates were already
~10% above consensus prior to the results and we see these results as
backstopping our bullish outlook. Our 2014 estimates rise to account for
faster than anticipated margin expansion. Our target price multiple has
increased to 7.8x, which is at the high end of the historical range of its
peers. We expect continued strong execution by FRC in 2H14, against a
backdrop of improving industry demand/pricing levels, to drive further
multiple expansion in the stock.
Operating leverage impressive; backstops our margin expansion
forecast. On the back of full utilization through both March and April,
FRC was able to grow EBITDA ~90% q/q on the back of an ~28% rise in
revenues, with margins rising ~920bps. This placed margins at ~19.9%,
well ahead of our 15.8% estimate. This level is actually in-line with our
prior forecast for Q3, highlighting the margin recovery appears ahead of
our expectations.
Visibility for next 12 months drives strong outlook. Management noted
it has visibility through next winter's drilling season and confidence in this
visibility steadily improved through Q1/14. Current client indications point
to a very busy summer drilling season, post spring break-up.
Spot pricing set to move for Q3, FRC ~50% exposed. FRC pointed to
expectations for 10% increases to spot pricing for Q3, with a portion of
this for cost recoveries (2-3%). Approximately 50% of FRC's equipment
is exposed to spot market dynamics. Pricing remains 30-35% below last
cycle's peak levels. Further pricing increases would be a late Q3/early Q4
time-line, assuming industry demand remains strong.
Balance sheet to fund further growth. With 2015 FCF estimated at
$67MM(post dividends), FRC can fund both organic fleet growth and
potential dividend growth. Management has indicated that fleet growth
beyond 10% per year is challenging due to the difficulty sourcing skilled
labour. We estimate 10% fleet growth would utilize less than 50% of our
FCF estimate in 2015.