Updated Notes - TD - downgraded Enercare to Hold and PT $20Maybe the increased selling pressure came after TD came out with a second update for Enercare and downgraded to a HOLD from a BUY and lowered price target to $20 from $22. Maybe other brokerages may have followed suit. Recommendation: HOLD
Prior: BUY
Risk: MEDIUM
12-Month Target Price: C$20.00
Prior: C$22.00
12-Month Dividend (Est.): C$0.96
12-Month Total Return: 6.1%
Event
Enercare reported Q1/17 revenue of $277.8mm, versus our estimate of $263.3mm and consensus of $281.1mm.
Adjusted EBITDA for the quarter was $52.5mm, versus our estimate of $60.5mm
and consensus of $61.5mm.
Impact: NEGATIVE
The quarterly results missed our expectations primarily on elevated SG&A costs
(up ~$8mm from Q3/16 and Q4/16 levels), which appear to be tracking materially
higher than our previous estimates and we believe have resulted from Enercare
beginning to roll-out its rental program across the Service Experts platform.
Our target price has decreased to $20.00 (from $22.00) based on 9.5x
(unchanged) our reduced F2018 EBITDA estimate and increased forecasted net
debt.
Enercare shares have rallied materially post the takeout of its major competitor in
Ontario (Reliance Home Comfort) which, while notable from a theoretical valuation
perspective, was unwarranted, in our view, given that we do not see a takeout of
Enercare occurring in the near-term.
We still believe that Enercare has an outstanding collection of assets with longerterm
growth potential in both Canada and the U.S., but for investors seeking to initiate or add to a position in the company, we recommend waiting for a lower entry point. As a result, we are downgrading Enercare to HOLD (from Buy) at this
time.
TD Investment Conclusion
Enercare is a well-run and stable company with a portfolio of rental assets that
generate reliable cash flows supportive of the attractive dividend. We believe that
the company has good opportunities for growth from HVAC rentals, sub-metering,
and new product launches, and that the Service Experts business offers additional
avenues for growth.
However, we believe that, relative to its one-year average EV/NTM EBITDA multiple of 9.4x and its 5-year average EV/NTM EBITDA multiple of 7.7x, the current valuation of 10.3x F2017E EBITDA could appear stretched.
Outlook
The primary variance in the quarter between our Q1/17 Adjusted EBITDA estimate and reported Q1/17 Adjusted EBITDA was SG&A, which increased by ~$8mm (~10%) from the ~$80mm quarterly SG&A reported in Q3/16 and Q4/16. On a segmented basis, the most significant change in SG&A occurred at Service Experts, which we believe is likely the result of the company's recent roll-out of the rental program across the Canadian platform and in select U.S. states. We are concerned that this elevated level of SG&A may persist for the foreseeable future, as management noted on the conference call that, aside from one-time items that it cited (namely ~$2mm of share-based compensation expense) and potential for slight SG&A reductions in sub-metering (which represented only $5.7mm of the $88.5mm of SG&A in the quarter), it believes that the current run-rate is likely to remain relatively unchanged moving
forward. Moreover, with the full roll-out of the rental program not expected to be completed until 2018, we are concerned that there may be potential for these SG&A costs to escalate even further.
We have updated our estimates to account for the quarterly results,
management's commentary, and changes in Enercare's installed asset base,
with the most material change being increased estimated SG&A moving
forward.