TSX:PSI - Post Discussion
Post by
retiredcf on Dec 06, 2023 9:36am
RBC Raises Target
Their upside scenario target is now $26.00. GLTA
December 5, 2023
Pason Systems Inc
IWS acquisition enhances future growth visibility
Outperform
TSX: PSI; CAD 14.31
Price Target CAD 19.00 ↑ 18.00
Our view: Pason plans to acquire the outstanding shares of Intelligent Wellhead Systems (IWS) for $88MM, plus $7MM of assumed debt. We think the acquisition provides Pason with a meaningful growth driver that could add meaningfully to its EBITDA and FCF generation capability in the coming years as controls and data acquisition become more important in the well completions market. $18 prior)
Key points:
Folding in IWS. PSI announced the acquisition of all the remaining outstanding shares of IWS for $88MM, plus $7MM of net debt. The transaction is expected to close on January 1, 2024, and will be funded through PSI's cash position of $179MM (3Q23). Prior to this investment, Pason had invested $66MM in IWS.
IWS provides exposure to the well completions market. IWS provides controls, data acquisition and software to automate workflows at live well completions operations. In particular, IWS provides automated well switching through its Digital Valve Controls (DVC) without the need of human intervention. This can be a critical component in modern multi- well completion techniques, such as Zipper and Simultaneous frac where efficiency and safety are value drivers.
Future growth could be material to PSI stock. Pason believes IWS's market size could equal its drilling market in North America. To put it into context, PSI's NAM drilling business generates about $300MM revenue annually. At a 30-35% EBITDA margin, IWS could add about $100MM of EBITDA, or $6-7/share based on current trading multiples. Recent growth trends have been encouraging as IWS's FY23 revenue of $45MM has grown $22MM y/ y, a pace we expect to continue through 2025.
FY24 capital plans and estimate changes. We increase our 2024/25 capex to $70MM from $45MM, for $25MM of additional capex allocated to the IWS business. We increase our FY24/25e EBITDA by 8/10% to $201/231MM, driven by the IWS acquisition as noted in Exhibit 1. We expect PSI to generate $97MM pre-dividend FCF in 2024, mapping to an 8% yield and 21% margin of revenue (land driller average of 27% and 11%).
Favourable relative valuation. Pason currently trades at 2023E/24E EV/ EBITDA multiples of 5.5x and 4.8x. Pason historically has traded at a 3.4x premium (~1.2-1.4x current) to land drilling peers. We expect the premium to be largely restored through the cycle.
Maintaining Outperform rating with $19 price target ($18 prior). Our $19 price target is based o e of our revised 2024E EBITDA. We assign a premium multiple relative to our Canadian OFS coverage group based on stock-specific factors within our valuation framework.
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