upgrade by CIBC! NFI Group Inc. (NFI-T) is a potential private equity target if its share price continues to “languish,” said CIBC World Markets analyst Kevin Chiang, pointing to its market position, “strong” free cash flow generation and “positive trends withing the public transportation space.”
“As we look out into 2020 we recognize that NFI, which we rate Outperformer, has significantly underperformed expectations,” said Mr. Chiang in a research note. "NFI’s share price has been under pressure over the last couple of years given concerns over a slowing economy, risk of increasing competition, impact of electric buses, and execution issues, especially around the ramp-up of its KMG facility. Since the start of 2018, NFI’s share price is down 50 per cent and its EV-toforward-EBITDA multiple has compressed by over two points.
“That said, we continue to have a long-term favourable outlook for the company as we continue to see it as well-positioned to benefit from the megatrend related to urbanization and the need for more public transportation. As a leader in the North American bus industry, and with its recent acquisition of ADL providing an international growth opportunity, NFI is positioned to benefit from these structural tailwinds.”
Emphasizing its long-term earnings growth potential and private equity’s history of investing in the busing industry, Mr. Chiang thinks the market may be “underappreciating” NFI’s potential.
He maintained an “outperformer" rating and $36.50 price target, which exceeds the current consensus of $33.44.
“In our LBO analysis we assume 1) NFI can hit a large percentage of its longterm earnings growth potential, 2) Demand trends in the North American transit and coach markets reflect replacement demand, 3) NFI maintains its market share in North American heavy-duty transit and coach markets, and 4) a two-year recession in 2020/21, which we have not included in our published estimates,” he said. “Using an 8.5-times exit multiple, 2026 as the exit year (seven-year hold period), exit EBITDA of $433-million and an exit leverage ratio of 2.7 times, our LBO analysis produces an IRR of 20 per cent assuming a takeout value of $40 per share.”