BMO Nesbitt Burns analyst John Gibson said Mullen Group Ltd. (
) overcame industry headwinds to post “strong” second-quarter results, “driven by sequential margin improvements in each of its core operating segments.”
The Alberta-based trucking and logistics firm reported revenue of $494.3-million, which was flat sequentially. However, adjusted EBITDA of $83.4-million topped both Mr. Gibson’s $77.2-million estimate and consensus forecast of $78.0-million.
“The beat on our numbers was driven by sequential margin improvements across each of its core reporting segments,” the analyst said. “The stand out in the quarter came from Logistics & Warehousing, which reported segment margins of 21 per cent, up nearly 300 basis points quarter-over-quarter and 150 basis points year-over-year.”
“On its conference call, management reiterated that consumer demand remains strong, although inventory management has caused the biggest impact to financial results in 1H/23. Pending consumer demand holds, we believe a fairly significant restocking of inventories could occur towards year-end 2023 or early-2024. If/when this occurs, Mullen’s financial performance holds significant torque, particularly as pricing moves higher. We aren’t seeing this quite yet, although the tipping point is coming into view. Additionally, we expect the company could see some modest short-term impacts from the ongoing Vancouver port dispute.”
Mr. Gibson thinks Mullen will likely exceed its full-year 2023 guidance of $2-billion in revenue and $300-million in EBITDA, which was reiterated on Thursday.
“The company holds underappreciated torque in its earnings when conditions (particularly pricing) improve, although we believe we are still a few quarters out from this,” he said.
Reiterating a “market perform” rating, he raised his target to $16 from $15.50. The average is $17.02.
“MTL’s business remains one of the more stable platforms in our coverage universe, although its conservative outlook into 2023 causes us to maintain a more neutral tone on the shares,” he concluded.
Other analysts making changes include:
* Raymond James’ Andrew Bradford to $18 from $17 with a “strong buy” rating.
“We expect the market was knee-jerk reacting to phraseology from the outlook and conference call, like ‘freight recession’, ‘reduced demand’, or ‘pricing pressure’,” he said. “Mullen was emphatic that consumer demand has held up well, though commercial inventories have been drawing down to meet this demand. Investors might be justifiably concerned about consumer resolve as higher mortgage rates and rents chew into discretionary spending capacity. Lastly, it’s an open question as to how the market will ultimately react to Mullen’s recent acquisition pivot toward energy and mining.
“From our viewpoint, we expect the inventory de-stocking cycle will have run its course before long, which could notionally offset risks around consumer demand as Mullen begins refilling inventories. This is driving our flattish EBITDA outlook over the next several quarters. Importantly and perhaps tellingly, MTL didn’t affect any adjustments to its 2023 business plan, which was predicated on generating $300-million EBITDA in 2023 (which isn’t to be confused with official EBITDA guidance). Mullen’s 1H23 results annualized to $322-million, though we are expecting some derivative impacts in 3Q23 from the Port of Vancouver strikes.”
* Scotia’s Konark Gupta to $19 from $18.50 with a “sector outperform” rating.
“MTL reported its first EBITDA decline in nine quarters, although it was better than our recently raised expectation,” he said. “While freight recession continues, MTL’s recent tuck-ins, solid cost control and diversified business (particularly exposure to western Canada) provided a nice offset. Management noted early signs of stability in freight volumes, barring the ongoing B.C. port disruptions in Q3, as consumers are adjusting to higher interest rates and businesses are rebalancing inventories. As we expected, MTL reaffirmed $300-million EBITDA target for 2023, which management still considers as conservative but sounded more confident, in our view. The company also remains committed to creating value through accretive acquisitions, focusing particularly on the LTL and S&I segments (plus opportunistically L&W) with a greater bias toward mining/energy end-markets, while shying away from asset-based opportunities in the U.S.”
* RBC’s Walter Spracklin to $15 from $14 with a “sector perform” rating.
“MTL posted a better than expected Q2 result - and we were therefore surprised by the sharply negative reaction on the open - and even after having recovered to flat on the day we remain somewhat perplexed,” said Mr. Spracklin. “Management also noted that acquisition multiples are moving lower - which we believe could drive a pickup in activity and act as a key catalyst for the shares. While we see value in the shares at current levels (13-per-cent FCF yield on our 2023 estimate), we continue to expect an uncertain macro environment to weigh on sentiment and therefore maintain SP.”
* TD Securities’ Tim James to $18.50 from $17 with a “hold” rating.
“We believe that Mullen’s Q2/23 results and our expectations for 2023 will compare very favourably with other North American trucking peers,” said Mr. James. “Consensus estimates for a group of diversified LTL and TL peers imply an average year-over-year revenue decline of almost 20 per cent in Q2/23 vs. MTL’s reported 5-per-cent decline, and average OR expansion of 350 bps vs. MTL’s reported increase of 170 bps. Current sector valuations suggest some upside to our current Mullen target multiples. However, we question how sustainable sector multiples are, given historical precedents, and therefore we believe it is prudent to wait and see if the historically high sector valuations are sustainable before considering raising our Mullen target multiples. We believe that Mullen’s exposure to resource industries and the Canadian LTL market, combined with its strong balance sheet, provide it with an ability to outperform during a challenging industry backdrop. Although we view Mullen’s approach to dealing with challenging industry conditions as prudent, we believe negative sentiment related to weak industry metrics and economic uncertainty through 2023 could limit the short-term share-price potential. For investors with a 12-month investment horizon, we believe Mullen’s attractive dividend yield, strong balance sheet, and strong management team justify continuing to own the shares.”
* CIBC World Markets’ Kevin Chiang to $16.50 from $16 with a “neutral” rating.
* Cormark Securities’ David Ocampo to $19.25 from $17.75 with a “buy” rating.
MULLEN GROUP LTD
15.85+1.30 (8.93%)