RE:RE:what's uplots of price volitility for sure... but the road ahead looks good :)
Despite Canadian trucking volumes “experiencing some weakness,” National Bank Financial analyst Cameron Doerksen reaffirmed “a positive view” on Mullen Group Ltd. (MTL-T +2.00%increase), seeing the potential for a “favourable environment” later this year and emphasizing pricing has been “resilient so far.”
He assumed coverage of the Okotoks, Alta.-based freight transport services company with an “outperform” recommendation on Tuesday, seeing an “attractive valuation with M&A upside.”
“While most freight indicators we track remain soft, recent commentary from publicly traded North American trucking companies suggests an expectation that volumes could strengthen later in 2023 and into 2024 as current high retail inventory levels are drawn down and a re-stocking begins,” said Mr. Doerksen. “Mullen’s Specialized & Industrial Services segment is experiencing some pricing strength supported by modestly higher activity levels in the oil field services industry.”
“With seller valuation expectations re-set lower, management is seeing more potential opportunities for M&A in 2023. Mullen ended 2022 with comfortable leverage (2.1 times net-debt-to-EBITDA) and only $23 million drawn on its $250 million credit facility. We estimate that the company could deploy upwards of $200 million towards M&A in 2023 and keep its leverage ratio below management’s comfort level of 2.5 times.”
The analyst noted investor sentiment toward trucking stocks has improved, however Mullen “has not participated,” lagging peers thus far.
“From the peaks in late 2021 and early 2022, trucking valuations plunged last year as freight rates and demand softened and as fears of a recession grew,” said Mr. Doerksen. “However, trucking stocks have rallied so far in 2023, with LTL [less-than-truckload] stocks up an average of 19.3 per cent year-to-date, TL [trucking/logistics] stocks up an average of 8.5 per cent year-to-date and the Dow Jones Trucking Index up 10.0 per cent year-to-date. By contrast, Mullen shares are essentially flat so far in 2023 and the stock’s valuation based on both forward P/E and EV/EBITDA is below comparable U.S. peers. Based on our 2023 forecast, Mullen is currently trading at 6.7 times EV/EBITDA versus the weighted average peers (based on MTL’s revenue segmentation) at 7.9 times while on P/E Mullen is trading at 12.6 times versus the weighted average peers at 15.6 times.”
Seeing Mullen’s 2023 guidance as “relatively conservative” and pointing to its “history of strong free cash flow and a supportive dividend,” Mr. Evershed set a target of $18.50 per share. The average is currently $16.30.
“Mullen has a proven track record of generating solid free cash flow as well as capital discipline,” he said. “The strong cash performance will allow the company to make acquisitions without the need for additional equity capital. Given the softer market conditions, we expect Mullen’s dividend to remain flat in 2023, but would expect dividend increases in 2024 and beyond as market conditions improve. The current dividend yield is 5.0 per cent. Mullen also has a track record of returning cash to shareholders through its NCIB. Under its NCIB that ran the past twelve months, Mullen repurchased a little over 2.0 million shares at an average cost of $13.33 per share. The company recently renewed its NCIB for another year allowing it to repurchase up to 8.6 million shares. We note that our forecast does not incorporate any NCIB activity.”