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Small cap to watch: This TSX dividend stock is surging on an acquisition — and analysts expect more deals to come
BRENDA BOUW
Shares of Mullen Group Ltd. (MTL-T +1.88%increase
) accelerated on Monday after the Alberta-based trucking company announced an acquisition that analysts expect to be one of a handful this year to help drive its expansion plans.
The stock rose by as much as 8 per cent to $11.83 in early trading, just shy of its 52-week high of $11.84 reached in December. The stock is up more than 200 per cent from its 52-low of $3.85 in late March when markets tanked amid the initial economic fallout from the pandemic.
Okotoks, Alta.-based Mullen Group said on Monday that it has a letter of intent to buy Mississauga-based logistics and transportation company APPS Transport Group Inc. — and the businesses APPS Cartage Inc. and APPS Cargo Terminals Inc. — which service the food and beverage and retail and consumer sectors. The company said APPS will operate within its Less-Than-Truckload Segment (LTL) and it is expected to generate annualized revenue of approximately $90-million.
The acquisition price wasn’t included in the release. Mullen Group said it will funding the transaction from existing cash and credit lines.
“Overall we like this move as it fits into MTL’s vision of expanding its network of LTL services in smaller communities, as well as growing its warehousing capabilities in the larger centers,” BMO Nesbitt Burns analyst John Gibson said in a note to investors on Monday. MTL is the company’s stock symbol. Mr. Gibson has an “outperform” rating (similar to buy) and a $13 target price on the stock.
“The company believes LTL businesses are much more effective in smaller communities, as companies like Amazon don’t have as many distribution capabilities relative to larger centers (i.e. in bigger city centers, e-commerce products are typically shipped straight from the warehouse to individual and bypass local LTL companies),” Mr. Gibson wrote.
He also said the company “has been vocal about pursuing M&A” and expects APPS “could be the first of several acquisitions the company announces this year, which could act as catalysts for the stock.”
In an email to the Globe, Mr. Gibson said rising oil prices are helping the stock’s recovery, “but more broadly [it] has been a strong recovery in consumer demand,” as the economy rebounds.
In its business plan announced in December, Mullen Group said it expects to benefit from the consumer-driven economy coming out of the pandemic and is “prepared and positioned to capitalize on the economic recovery.” The company also said it has a “very healthy cash balance” of more than $100-million that will be used to pursue acquisitions.
Bank of Nova Scotia analyst Konark Gupta said in a note to clients on Monday that the stock had recently been “under some pressure due to the lack of a meaningful acquisition (beyond tuck-ins) and this latest acquisition is material in nature, in addition to being in MTL’s core (Canadian LTL).”
Mr. Gupta, who has a “sector outperform” and $14 price target on the stock, also said Mullen Group is “very prudent when it comes to capital deployment, so we don’t think there is a high risk in closing,” of the detail.
He also noted that TFI International Inc. had signed a definitive agreement to acquire APPS in August 2020 but the company said in its third-quarter earnings call in October that the deal was called off after certain closing conditions were not met.
“We believe it is possible that TFI could have faced anti-trust concerns given its already dominant position in Canada. However, we don’t expect such hurdles in MTL’s case, given it is smaller than TFI in the Canadian market,” he wrote.
IA Capital Markets analyst Elias Foscolos said in a note on Monday that expects the company to make more acquisitions after a slow couple of years.
“MTL should still have dry powder after this acquisition,” he wrote, “but we expect MTL to maintain its patient approach to M&A, emphasizing proper value and strategic fit.”
He has a “buy” and $14 target on the stock.