Mullen Group Ltd. T.MTL

RBC Upgrade

[retiredcf]

Current and upside scenario targets have been raised to $12 and $15. GLTA

October 22, 2020

Mullen Group Ltd.

Solid Q3 result caps off an impressive crisis management experience for MTL

Our view: We are very impressed with how MTL mgmt handled the COVID-19 crisis. The diversification out of energy served them well when the pandemic hit, and having a well-insulated balance sheet paid of in spades. The company managed costs well during the worst of the crisis, and even directed cash toward buyback when the shares hit their lows. Now looking forward, we see the company as well positioned to benefit from the rebound, not to mention the M&A catalyst. Reiterate Outperform rating on the shares.

Key points:

Q3 results above expectations. Q3 EBITDA of $55.0MM was above consensus of $52.6MM (RBC: $51.5MM). Variance was due to better than expected results in Specialized & Industrial Services reflecting greater demand for large diameter pipeline hauling and stringing services as well as greater demand for civil construction services in northern Manitoba.

Mgmt strikes an optimistic tone - more guidance to come in Dec. Mgmt sounded fairly upbeat, especially relating to the better than expected trends in the company's Industrial Services division - and a view that consumer spending has been very strong. While the company provided some colour into Q4 trends and expects EBITDA to be in line with last years', mgmt indicated that a more fulsome outlook would be provided on Dec 9 when the company releases its 2021 business plan. Nevertheless, we were encouraged by the trends to date and we expect a positive tone to emerge on Dec 9, and our upward revised estimates reflect that view. Our EBITDA goes to $198MM (from $195MM) in 2020, to $217MM (from 2020 $207MM) in 2021 and to $224MM (from $214MM). On the back of our higher estimates, our target goes to $12 (from $11).

Acquisitions remain a key catalyst. While the shares are up nicely following the Q3 report, we see further opportunity in M&A. The company signaled that they were "inundated" with calls by sellers looking to exit, and were judiciously reviewing those potential deals. We see increased M&A as a key catalyst for the MTL shares and we are optimistic based on the pipeline trends indicated on the call.

Our take on the stock. Kudos to mgmt in how they handled this crisis. They were well-prepared coming into COVID-19, with a meaningfully more diversified asset base and a strong B/S. During the crisis, they did well to reduce costs and protect cash flow - and even directed a significant amount of capital toward buying back stock. Looking forward now, the company sees a brighter future ahead and are positioned well for the turn- around. While the shares have rallied, we expect further opportunity in M&A as the company looks east. We recommend investors buy ahead of an M&A pickup and ahead of the Dec 9 release, which we expect will be a positive outlook. Reiterate our Outperform rating on the share