Enercare, Inc. CSUWF

RE:Rbc's view unchanged

[retiredcf]

Here's the report. They maintain their current and upside scenario targets of $26 and $28. GLTA

May 14, 2017

Enercare Inc.

Share price weakness opens up a buying opportunity

Our view: We believe the shares of Enercare were oversold on the back of weaker-than-expected Q1 results. A large part of the Q1 miss was due to the mild winter and one-time items, and our investment thesis is unchanged. We are reiterating our Outperform rating and see the share price weakness as a near-term buying opportunity.

Key points:

Investment thesis unchanged - attractive return on invested capital.

Management estimates that the capital invested in water heater and HVAC rentals generates an unlevered after-tax return of 13-21%. We estimate that one dollar of value is created for every dollar of capital invested to grow the rental portfolio (i.e., $1 invested at 13-21% return is valued at $2). Management’s 2017 mid-point forecast investment into HVAC rentals is $49 million (14,500 HVAC units), up from $32 million (10,300 HVAC units) in 2015. If Service Experts (SE) is able to achieve a 10-20% rental penetration rate in the next 2-3 years, we estimate HVAC investments would increase by approximately $20-40 million/year.

Rental penetration rate at SE should pick up over time. Currently rentals have been rolled out to SE's Canadian operations and 5 (of 29) states. It is still early days, and the preliminary rental mix of total HVAC originations in the U.S., Western Canada, and Ontario were 3-5%, 7-10%, and 15-20%, respectively. Some investors may have been disappointed with the initial U.S. rental mix. A factor in the rental rate is the salesperson/technician's familiarity and comfort level with the rental offering, which takes time to develop. For example, Enercare Home Services achieves a 60-70% rental mix in Ontario, while SE only achieved a 15-20% rental mix in the same 2017 0.12A province after it was recently rolled out in late 2016.

Mild winter drove some weakness in Q1. Enercare's Q1/17 Adjusted EBITDA of $52 million (excluding acquisition-related costs) was below our estimate and consensus of $62 million. The variance to our estimate is largely due to negative $3.5 million EBITDA contribution from Service Experts (management previously guided the street towards $0 million EBITDA due to seasonality), weaker-than-expected contribution from Home Services (8,500 fewer home visits due to mild winter), as well as $3.5 million of one-time expenses.

Tweaking estimates. We are reducing our 2017 and 2018 ACFFO/share estimates to $1.58 and $1.92 (from $1.76 and $1.95), respectively, to reflect Q1/17 results, a slight increase in our maintenance capex forecast, and a modestly slower growth in the sub-metering business.