RBC Raise TargetAnd also bump their upside scenario target to $19.00. GLTA
November 16, 2015
EnerCare Inc.
Solid Q3 results; improving visibility on organic
growth
Our view: Enercare reported another solid quarter, achieving net growth
in the rental portfolio while continuing to improve visibility on organic
growth. We have increased our price target to $17 (from $16) to reflect
rolling forward our valuation base year to 2017 (from 2016).
Key points:
Rental portfolio well positioned to grow. Consistent with Enercare's
October business update, the rental portfolio achieved net unit growth
in Q3/15 for the first time in eight years. We expect the rental portfolio
to continue growing due to the combination of improvements in attrition
and management's focus on increasing HVAC rentals rather than outright
sales. In addition, the 2016 introduction of water treatment rental
products may further improve organic growth.
Decline in protection plan not expected to have a financial impact.
The number of protection plan customers modestly declined by 4,000 to
548,000. Management indicated that some of the attrition is due to nonrenewals
of one-year promotional offers (given away at no cost) related
to HVAC sales provided in 2014. In addition, some of the new protection
plans combine multiple services into one contract. Finally, as the company
focuses on HVAC rentals rather than sales, there are fewer opportunities
to sell protection plans, as rentals already include the service offered by
protection plans.
Sub-metering business potentially cash flow positive by year-end.
Management has a target for the sub-metering business to be cash flow
positive (after capex) by year-end. We estimate that the sub-metering
business generated less than $1 million of negative free cash flow in
Q3/15, so we believe it is possible to achieve positive free cash flow
by year-end. During Q3/15, the sub-metering business added 4,000
contracted units and 4,000 billable units, which is largely in line with our
estimate.
In-line Q3 results. Enercare's Q3/15 Adjusted EBITDA of $61 million
(excluding acquisition-related costs) was largely in line with our estimate
of $62 million and above consensus of $59 million. The ACFFO/share was
$0.33, compared to our estimate of $0.34. We have reduced our 2015
ACFFO/share forecast to $1.30 (from $1.32) to reflect the Q3/15 results.
Increasing price target to $17 (from $16). We have modestly increased
our price target to $17 (from $16) to reflect rolling forward our valuation
base year to 2017 (from 2016). Our price target is based on 13x
(unchanged) our forecast ACFFO/share.