More ReactionsOnce again indicating that the RBC guy is on his own target wise. Considering adding more this morning. GLTA
IA Capital Markets’ Matthew Weekes attributed the 9.1-per-cent drop in Mullen Group Ltd. shares on Thursday to “profit taking and concerns over economic growth downside and pricing declines going forward” following the premarket release of better-than-anticipated third-quarter results.
However, the equity analyst thinks the Alberta-based trucking and logistics company is making the right decision by focusing on returns and sees it poised to benefit from a “resurgence” in oilfield services activity.
“MTL continued to emphasize a cautious approach to M&A in the uncertain environment, preferring to focus on the balance sheet and optimizing yield and shareholder returns, while demand and margins may be impacted in the near future by an economic slowdown,” said Mr. Weekes in a research note. “While MTL has noted that valuations are compressing, it needs to identify a clear strategic fit and synergies before it will pursue a transaction. This strategy combined with the favourable industry environment position MTL to generate strong returns while positioning the balance sheet for either downside or upside scenarios. MTL reduced its net debt balance during the quarter and has the potential to fully pay down its credit facility should non-core asset sales close. Additionally, MTL has continued to buy back shares, repurchasing more than 200K shares in the quarter for $2.5-million. In 2022, we forecast that MTL will generate a double-digit after-tax ROIC while converting OIBDA into AFFO at an 55-60-per-cent ratio.”
For the quarter, Mullen reported operating income before depreciation and amortization (OIBDA) of $98-million, up 52 per cent year-over-year and exceeding the forecasts of both Mr. Weekes ($92-million) and the Street ($90-million).
“MTL continued to benefit from strong pricing and demand across the business, which have more than offset inflation,” he said. “Operating margin exceeded our forecasts in all of MTL’s asset-based segments. The beat firmly puts MTL on track to exceed its previous 2022 OIBDA guidance of $300-million. MTL indicated on the call that it could potentially earn OIBDA upwards of $90-million in Q4 (iA estimate: $85-million).”
“MTL indicated that it expects future results to moderate, but that this could take time and that demand is expected to remain strong through the balance of the year, supported by stable employment, consumer demand, and continued capital investment in the economy. Meanwhile, the Company expects supply chain issues and high fuel costs to persist, which are expected to have an outsized impact on independent contractors.”
Maintaining a “buy” rating, Mr. Weekes trimmed his target for Mullen shares by 50 cents to $17. The average on the Street is $16.70.
“While MTL will likely experience a degree of softening in freight rates through 2023, structurally tight OFS markets could provide a longer runway of pricing upside in those business units, providing a partial offset,” he said. :The economic outlook remains uncertain, but we believe MTL is taking a prudent approach to addressing this uncertainty, which includes (a) focusing on margin and remaining disciplined with capital while internal growth capacity is limited, (b) strengthening the balance sheet and generating strong returns for shareholders, and (c) positioning to shift back to strategic M&A once there is more clarity on interest rates, the direction of the economy, and M&A margin accretion potential.
“We are lowering our target price as we incorporate a more conservative valuation, reflecting higher interest rates and cautiousness on the economic outlook,” he said.
Elsewhere, BMO’s John Gibson trimmed his target by $1 to $17 with an “outperform” rating.
“MTL’s Q3/22 results were once again strong, led by pricing increases and solid activity levels across the majority of its operating segments. Despite the strong print, MTL stock fell 9 per cent on the day on the back of a broader Trucking/Logistics sell-off. We feel the reaction was overdone, particularly given MTL’s strong outlook into Q4/22,” said Mr. Gibson.