CIBC ReportClearly the most conservative of the group. GLTA
EQUITY RESEARCH
April 21, 2022 Earnings Update
MULLEN GROUP LTD.
Exhibiting Resiliency Despite The Challenges To Start 2022
Our Conclusion
MTL’s Q1 results and outlook reflect a more resilient business model as it
faces inflationary pressures and broader supply chain disruptions (i.e.,
blockades, extreme winter conditions). Despite these challenges, MTL
maintained its earnings expectations for the year and we see upside to this
given the company’s commentary around March performance and M&A
optionality. Our price target moves up $0.50 to $14.00 and we maintain our
Neutral rating.
Key Points
Combatting Inflation With Higher Prices: Inflation is a key concern
heading into Q1 earnings season across our coverage universe and it was
clear that MTL continues to have levers to help combat this. First, while fuel
prices doubled Y/Y, MTL’s fuel surcharge program will help alleviate this
pressure, however, there is a lag in catching up to pricing. MTL has the
financial strength to weather this temporary dislocation. Its most direct lever
though is raising pricing and we continue to see freight capacity at a premium allowing MTL to pass along higher costs in the form of higher all-in rates. Our view is that the company is focused on ensuring its absolute earnings is not eroded by rising opex.
Freight Recession? Not So Fast: Concerns over a freight recession have
hit the North American transport sector, and while MTL is conscious that the
consumer is facing some pressure from higher inflation, the company’s
outlook remained constructive across its main divisions. Within LTL, while
MTL sees freight volume trends moderating, after two years of exceptional
growth, the company continues to have pricing power and will continue to
pursue acquisitions that improve lane density or network reach. Within L&W,
the recovery in the industrial economy is a tailwind for this segment. Within
S&I, MTL is optimistic that rising commodity prices and need for energy
infrastructure will drive higher capex in the oil & gas sector. While MTL held
its 2022 EBITDA guidance of ~$260MM, the company was clear it saw a path toward potentially exceeding this given March trends and upside from M&A.
Inflation Will Keep The Market Tight: While a lot of attention has been paid
to the impact of inflation on the consumer and the headwind this potentially
presents to freight volumes, MTL highlighted that this will also contribute to
tighter capacity. We have seen new entrants enter the freight market given
the favourable environment the last couple of years but do not have an
operating model that has been tested through the cycle. Add to that, vehicle
costs have been elevated given the lack of supply meaning new entrants are
sitting on a higher cost structure. Putting this together means that while
freight volumes are set to moderate from unsustainable levels during the
depths of the pandemic, smaller less profitable firms will also be forced to
exit the market. MTL sees this as keeping capacity tight, which in turn
supports its pricing power.