TD RPT (Buy $8.50 Target)Recommendation: BUY
Risk: MEDIUM
12-Month Target Price: C$8.50
12-Month Dividend (Est.): C$0.48
12-Month Total Return: 34.0%
Market Data (C$)
Current Price C$6.70
52-Week Range $4.99 - $8.39
Mkt Cap (f.d.) ($mm) $184.0
Float Cap ($mm) $143.1 EV ($mm) $243.4
Current Dividend $0.48
Dividend Yield 7.2%
Avg. Daily Trading Vol. 83,130
Financial Data (C$)
Fiscal Y-E December
Shares O/S (f.d)(mm) 27.5 Float Shares (mm) 21.4
Net Debt ($mm) $57.6 Net Debt/Total Cap 21.8% BVPS (basic) $7.52
Event Stuart Olson reported better-than-expected Q4/17 results.
The mid-point of SOX's 2018 EBITDA guidance range was slightly below expectations. That said, in our view, this is offset by the significant improvement in SOX's leverage and management's generally upbeat commentary around the company's prospect pipeline. Impact: SLIGHTLY POSITIVE
Adjusted EBITDA of $11.5mm was above consensus of $10.1mm and our $10.3mm estimate. Although both revenues and margins were ahead of expectations, the former drove the bulk of the beat
Notably, revenue of $282.6mm was up 29% y/y and came in well above expectations (consensus at $258.8mm and TD at $255.8mm). While all segments exceeded our forecasts, Industrial drove a large portion of the beat (segment revenues were up 64% y/y vs. TD's forecast of +39% y/y growth).
Adj. EBITDA margin of 4.1% was slightly above expectations. However, margins would have been higher were it not for unusually high corporate costs ($10.1mm vs. TD at $5.8mm). Within the core operations, Buildings and Commercial Systems margins were the bright spots relative to our forecasts.
Driven by very healthy FCF of $0.62/share (after w/c changes), SOX meaningfully reduced its leverage for a second consecutive quarter (net debt/TTM adj. EBITDA now at 1.7x vs. 2.4x at Q3/17 and 3.2x at Q2/17).
Management guided to 2018 EBITDA of $40-$43mm (pre-quarter consensus at $43.3mm), which implies y/y growth of 10-20% (driven by increased activity within Industrial and Commercial Systems).
We have slightly lowered our 2018 EBITDA forecast (reflects a lower margin assumption), while we have also introduced our 2019 estimates. Our target price remains unchanged at $8.50. TD Investment Conclusion We believe that SOX's financial performance will show continued improvement over our forecast period. Further, we continue to see the stock's valuation as attractive. We reiterate our BUY recommendation.
Details Revenue Well Above Expectations:
Consolidated revenue of $282.6mm was up a meaningful 29% y/y (second consecutive quarter of 20%+ y/y growth). All segments outperformed our revenue forecasts.
Buildings: Buildings saw its revenues grow 8.5% y/y (TD at +5.0%). The y/y increase reflected changes in the stages of completion on certain projects.
Industrial: Industrial revenue also increased meaningfully, up 64% y/y (TD at +39%). The gain reflects increased activity on a power project in Manitoba and a mining project in Ontario (expected to also be a positive driver in 2018).
Commercial Systems: Segment revenues were up 52% y/y (TD at +30%), which marked a return to positive growth following six quarters of y/y declines. Further, segment backlog reached a record level in Q4/17 and management appeared quite optimistic about the segment's outlook. Margins Slightly Beat: Adjusted EBITDA was $11.5mm (4.1% margin) – above consensus of $10.1mm (3.9% margin) and our $10.3mm estimate (4.0% margin). Within the core operations, Buildings and Commercial Systems margins were the bright spots relative to our expectations. The Buildings segment posted a 4.7% EBITDA margin (TD at 3.6%), as performance benefited from project mix. Commercial Systems' EBITDA margin of 11.7% (TD at 7.0%) was the highest since Q4/11 (benefited from a shift in project stage of completion). Further, we note that Q4/17's results were negatively impacted by much higher-than-expected corporate costs ($10.5mm vs. TD at $5.8mm), reflecting in part increased share-based compensation expense.
2018 guidance and outlook:
SOX expects 2018 consolidated revenue to be “modestly higher” than the $1.02bln earned in 2017. Revenue growth is expected to be driven by higher activity levels in Industrial and Commercial Systems. Notably, the Industrial segment is expected to benefit from increased activity in the oil sands (reflects increased maintenance/turnaround work) and from the completion of two large projects outside Alberta in the power and mining sectors. Conversely, Buildings is expected to see "modestly" lower y/y revenue as a number of projects are nearing completion this year.
Management guided to EBITDA of $40-$43mm, which implies y/y growth of 10-20% (expected to be driven by y/y gains in the Industrial and Commercial segments, as Buildings EBITDA is expected to remain stable).
We have made minor adjustments to our forecast. Of note, our 2018 estimates decrease modestly, driven primarily by our lower margin assumptions. We have also introduced our 2019 estimates. We model EBITDA of $42.9mm in 2018 and $47.9mm in 2019, which represents y/y growth of 20% and 12%, respectively. Balance Sheet and Dividend Update: Healthy FCF of $0.62/share (after working capital changes) reduced leverage notably. Net debt/TTM adj. EBITDA stands at 1.7x (down vs. 2.4x at Q3/17 and 3.2x at Q2/17). While we forecast a dividend payout ratio (on FCF after changes in w/c) well in excess of 100% in 2018 (reflects a w/c investment of $0.82/share), we expect the payout ratio to decline to 55% in 2019.