Substantial Issuer Bid On Deck Our Conclusion
SECURE posted Q1/24 adjusted EBITDA that was above expectations and
also increased its EBITDA and capital spending guidance for 2024. It also
indicated its intention to launch a substantial issuer bid (SIB) next week.
Given the company is carrying $264MM in unrestricted cash, is largely
through its normal course issuer bid (NCIB), and is forecasting ~$300MM in
free cash flow for 2024, SECURE has significant financial flexibility with
which to execute an SIB. We view the increase in growth capital
expenditures as a slight positive for the stock as it demonstrates the
company’s backlog of attractive organic projects. We have updated our
model on the back of this update, which drives a slight increase to our 2024
EBITDA estimate. We continue to like the stable EBITDA generation being
demonstrated by this business. We maintain our $12/share price target and
Neutral rating as our price target drives less potential upside than our other
Outperformer-rated stocks.
Key Points
Headline metrics were better than expected: Q1/24 Adjusted EBITDA of
$131MM was ahead of our estimate of $124MM and consensus of $122MM.
Capital expenditures of $19MM were below our estimate of $31MM and
consensus of $29MM.
Annual EBITDA and capital expenditures guided higher for 2024: The
company increased the low end of its annual EBITDA guidance by $10MM,
moving to a higher range of $450MM-$465MM. It also increased its growth
capital expenditure guidance by $25MM to $75MM, which we take as a
favorable update towards driving continued EBITDA growth in the business.
The increased capital expenditures relate to the construction of a produced
water pipeline to a waste processing facility, along with processing
equipment for phase 3 of the Clearwater Heavy Oil Terminal.
Strong balance sheet and cash on hand should provide SES with
sizeable liquidity to launch an SIB next week: SECURE repurchased
~12.1MM shares under its NCIB during Q1/24, and 2.8MM shares in April,
which leaves 6.8MM shares available to repurchase under its NCIB between
now and December 2024 (~$75MM at the current share price). The company
also announced its intention to launch an SIB next week. On our revised
estimates, SECURE will generate ~$265MM in free cash flow for the
remainder of 2024. Including unrestricted cash on hand of $264MM, we
expect SES to have ample flexibility to complete its remaining NCIB
repurchases this year, fund (and potentially increase) the dividend
($0.10/share quarterly), and execute an SIB of reasonable size. While the
range of potential SIB sizing could be wide given SECURE’s strong financial
flexibility, we surmise a $250MM SIB is a reasonable base expectation, but
concede it could also be higher than this.