While he remains “constructive” on the fundamental valuation and competitive position for Mullen Group Ltd. , iA Capital Markets analyst Matthew Weekes expects the trucking sector to start to endure further pressure given near-term economic headwinds.
Also seeing the valuation gap between the Okotoks, Alta.-based company and its logistics peers narrowing, he lowered his recommendation to “buy” from “strong buy” on Tuesday.
“Inflation has accelerated since Q1 reporting, which could reduce demand and pricing leverage going forward,” said Mr. Weekes. “While MTL demonstrated effective pricing leverage in its Q1 beat, we are cautious on market conditions going forward given continued high fuel prices along with accelerating general inflation and weakening consumer and business sentiment. Weaker-than-expected economic activity could provide downside to both the consumer and capital investment portions of the economy and therefore to consensus forecasts as the year progresses.”
“Factors working in Mullen’s favor. Supply chain and labour constraints and high diesel prices have likely limited new entrants into the trucking market compared to past cycles and additionally forced smaller competitors out of the market, reducing competitive pressures and potentially creating discounted M&A opportunities. Strong fundamentals for oil and gas could also provide upside to S&IS performance. This is somewhat of a natural hedge in the business against high fuel prices. Finally, we note that MTL’s Q1 results were strong despite pressures from cold weather, blockades, and the lag between fuel cost inflation and implementation of surcharges.”
Mr. Weekes emphasized logistics peers, particularly TFI International Inc. , have seen notable stock price declines thus far in 2022 “on concerns over freight market conditions related to the broad economy.”
“TFII is now trading within 0.5 times of Mullen’s EV/EBITDA multiple on 2023 estimates,” he said. “While we continue to project an attractive return for MTL based on our fundamental analysis and defensive 6.5-per-cent dividend yield, the upside based on a visible peer discount has been reduced.”
Pointing to higher cost of capital in the market and lower comparables, Mr. Weekes reduced his target for Mullen shares by $1 to $15.50. The average is $15.85, according to Refinitiv data.
“Nonetheless, we are constructive on MTL’s longer term outlook and fundamental valuation potential, and believe the Company also has several factors working in its favour that will help it manage through potential near-term market challenge,” he said.