Scotia's $19.00 Target Remains - StubbornlyAlaris Royalty Corp.
Remaining Active on the Deal Front with US$60M Follow-On Contribution in Planet Fitness
OUR TAKE: Slightly Positive.
Alaris announced a US$60.2M follow-on contribution into Planet Fitness (PF), consisting of a new US$43.7M preferred equity contribution, along with a US$16.5M investment in exchange for minority ownership of the common equity. The deal will also include an exchange of AD's existing preferred units, valued at US$27.8M, for a total investment of $88M in PF. The preferred units' value of $71.5M will result in annual cash distributions to AD of US$8.9M (12.5% pre-tax yield), with the expectation of another 5% increase in 2020. The investment follows AD's C$70M investment in Amur Financial Group last month, as deal flow picks up following a slow start to the year. With over C$160M invested thus far, Alaris appears well on pace to deploy a record amount this year. We note that while the total capital deployed is running ahead of expectations, the relatively high common equity component of the investment dampens the expected near-term cash flow accretion, but likely offers upside optionality over the longer term.
Maintaining $19.00 target price and SP rating.
KEY POINTS The agreement includes a Payment in Kind (PIK) feature whereby PF can elect up to pay in kind 32% of the annual distribution, with the remaining amount being paid monthly in cash, providing PF with financial flexibility. That said, AD noted that it is PF`s intention to pay the full distribution amount monthly rather than accruing the PIK. Following the investment, AD has ~C$270M drawn on its senior credit facility, with a capacity of C$80M available for investment purposes. The company noted that its senior lenders have extended the period to have the credit facility drawn above 2.5x contracted EBITDA until March 31/20, providing additional flexibility regarding capital allocation over the next three quarters. While debt levels are currently elevated, management expects this to be temporary as it expects partner promissory note repayments in the coming months, along with the continued expectation of a redemption to lower the debt. PF has been one of AD's top-performing partners for more than five years. Alaris initially made its investment in PF in 2014, when the company had 27 clubs opened, serving ~95K members. Today, the company operates 63 clubs in various U.S. states, serving over 530K members, with aspirations of opening 15 new clubs by 2020 and having a club count in excess of 95 by end of 2024.