Enercare, Inc. CSUWF

Enercare Upgraded by Scotia - Price Target $24

[lotus1]

Tuesday, July 4, 2017, Intraday Flash

Scotia Equity Research

Warming Up : Upgraded to Outperform from Sector Perform

OUR TAKE:

We are upgrading ECI shares to Sector Outperform. We believe ECI is a unique vehicle offering both a high level of FCF visibility (from its contracted units at Home Services) – without carrying yield sensitive characteristics typically found in sectors such as utilities, REITs, telecom, and infrastructure – as well as sustained momentum in earnings growth (from Service Experts). We would take advantage of the recent pullback to accumulate shares.

EnerCare has made significant strides in generating incremental revenues from additional verticals and de-risking its business (reducing earnings seasonality and cyclicality) over the last 3 years by increasing its rental/sales HVAC mix. We highlight that the market has paid for these strategies along the way (see Exhibit 3). While in the early days of its implementation, we believe ECI's US strategy of targeting locations with two distinct seasons which are also more consumer protection-friendly proves logical and should allow the company to make further inroads in increasing its rental mix. Lastly, our upgrade is predicated on a similar result (modestly lower activity but robust levels) to the foreign buyers' tax implementation in the GTA as we have seen in the GVR

KEY POINTS

We expect some deleveraging over our forecast horizon (see Exhibit 5). However, we are looking to see a material improvement in FCF starting in 2018/2019, at which point ECI should become more cash flow generative (deleveraging to accelerate) as it benefits from the investment it has made in the last few years in its Canadian rental strategy (including a portion of Service Experts). We expect success from the continued investments in rental conversions at Service Experts through 2019 (where we are looking for a 10%+ rental mix) to drive further multiple expansion.

We have made modest adjustments to our estimates and continue to highlight that we have seen no evidence of a change in the company's longer term strategy of improving its rental mix and growing ancillary revenues. We have raised the company's valuation to 10.5x EV/EBITDA (18E). This is in line with its current valuation and at a modest (and conservative) discount to its Home Service company peers. Again, we expect ECI's valuation to continue to rise as rental mix increases further and the company nears the end of its investment cycle. Lastly, we have put together a sum-of-the parts valuation supporting our $24/share target  (From $20)