Scotia Analysis - Complete ReportHey Minnie Mouse - Notice that the analysis has to take into account the 15% dilution (extra shares) due to the financing.
He ups to $18.50 (usually he has the lowest upside target) Likely only raised up due to Scotia involvement with the financing. That should let you know what I think of the target prices issued by most Bay/Wall streeters - a bit of a vested interest
Rating Sector Perform
1-Yr. Target C$18.50 AD.UN-T C$15.29
1-Yr. Return 29.1%
Div. (NTM) $1.24
Div. (Curr.) $1.24
Yield (Curr.) 8.1%
Strong Start to 2021 with Full-Year Capital Deployments Already Approaching Record Levels OUR TAKE: Positive. We are off restriction following AD's $85M (~$95M incl. overallotment) equity issuance. Since the announcement of the offering on Feb. 9, AD has announced: (1) two investments in new partners totaling US$96M; (2) a US$8M followon contribution in Accscient; and (3) increased its credit facility capacity to $400M. Alaris is off to a strong start on the deal front and has already deployed over US$180M this year. In just the first couple months of the year, 2021 is already nearing previous record full-year levels. Over the last twelve months, the company has deployed over $350M, making it AD's most active 12-month period in its history. Despite some lingering economic uncertainty due to the pandemic, management continues to find some solid investment opportunities. The robust capital deployment levels this year are already well ahead of what we had anticipated for the company to achieve over the course of the full year. Given the context of the current economic landscape, we expect Alaris to remain active on this front given the potentially large pipeline of some smaller businesses with solid fundamentals requiring capital injection. Raising target price to $18.50 (was $17.00), but maintaining our SP rating. KEY POINTS With operating metrics trending positively and deal activity coming in well ahead of expectations, we have increased our target multiple and are raising our target price despite slight downward revisions to our EBITDA/sh forecast. We expect additional distributions stemming from the investments, combined with some additional investment capacity to increase EBITDA and NCOA by ~10%. That said, with the unit count rising by ~15% through the equity issuance, we have modestly trimmed our estimates. To drive multiple expansion over the next twelve months, we would look for: (1) continued deployment of capital; (2) further demonstration of resilience and good health across the existing portfolio; (3) improvements in the operating environment for smaller businesses; and (4) progress in de-leveraging. To support further capital deployment, AD has ~$80M in additional capacity on credit lines. We believe the active deal environment also likely helps mitigate the reinvestment risk of early redemptions, which management has signaled as likely over the coming quarters
The company has deployed over US$100M through two new partner investments and an add-on contribution with an existing one. Alaris has been off to a strong start to the year on the capital deployment front, with the company on pace to already shatter its previous investment records (see Exhibit 1). In particular, the month of February has been very active for Alaris, which in addition to an upsized equity deal, has noted a number of corporate developments that include: 1. A US$66M investment in Brown & Settle – The investment in Brown & Settle (B&S), includes: (1) US$53.7M of combined subordinated debt and preferred equity, providing Alaris with an annualized distribution of US$7.5M (~14% pre-tax yield); and (2) US$12.3M for a minority common equity ownership. B&S has an estimated ECR of 1.5x to 2.0x. B&S is a full-service large-parcel site development contractor whose comprehensive suite of services include: excavation, clearing, rock blasting, concrete, paving, and utility installation in Virginia, Maryland, West Virginia, and the Greater Washington D.C. area. 2. A US$30M investment in 3E – On February 22 (post announcement of the equity offering), Alaris announced its investment in 3E that includes: (1) US$22.5M of preferred equity, which will provide AD with US$3.2M of distributions (14% pre-tax yield); and (2) US$7.5M contribution to an escrow account to be released if certain hurdles are met within 24 months, upon which AD will contribute up to US$7.5M for additional preferred units (for US$1.1M of additional annualized distributions). AD estimates the coverage ratio to be between 1.2x to 1.5x. 3E is a utility service provider that installs, inspects, maintains, and replaces critical infrastructure for blue-chip, investor-owned utility companies. 3. A US$8M follow-on contribution in Accscient – In conjunction with the 3E investment announcement, Alaris also noted a US$8M contribution in Accscient for additional preferred equity, which entitles the company to annualized distributions over US$1.1M (14.3% pre-tax yield). Accscient used the proceeds for investment purposes. 4. Increase in credit facilities to $400M – Along with its equity issuance, Alaris initially announced a bump in its credit facility limit to US$373M (from $330M) and noted that the company can also add an additional 0.5x EBTIDA to its leverage covenant for the March 2021 and June 2021 periods. This would allow for the maximum leverage to reach 3.5x through those two periods. Covenants return to the previous levels from Sept. 30 onwards. A few days later, with the announcement of the 3M and Accscient investments, the company noted that it was able to further increase the limit of the credit facilities to $400M, with the addition of a seventh bank to the lending syndicate. Following the increase, Alaris will have ~$80M available for future investment opportunities.
We have made a number of estimate revisions following the recent flurry of activity. Following the recent announcements, we have revised our forecast to include the following: (1) the B&S, 3E, and Accscient investments; (2) revision to our capital deployment outlook on the back of robust activity so far this year; (3) updates from the impact of the equity issuance; and (4) incorporating the new debt covenants and limits. We have increased our EBITDA and Net Cash from Operating Activities forecasts by roughly 10%, however, our per unit forecast moves down reflecting the ~15% increase in unit count (see Exhibit 2). For 2021E, our capital deployment outlook increased significantly given the company’s active start to the year. That said, we have a sizeable redemption included in our estimates for 2021E. For 2022E, we made a modest increase to our capital deployment outlook given a slightly higher capacity on the bank covenants due to the higher EBITDA contribution from the investments. Increasing target price to $18.50 (was $17.00), but maintaining our Sector Perform rating. Despite some dilution to our EBITDA/unit and NCOA/unit estimates, we are raising our target price to $18.50 (was $17.00) due to a higher valuation multiple. The higher target multiple reflects positive operating trends being demonstrated, along with deal activity coming in well ahead of expectations. Our target is derived from equal weighting of an 8.0x EV/EBITDA (2022E) and 8.3% NCOA/EV Yield (2022E). The stock is currently trading at 8.9% our NCOA/EV (NTM) Yield and 7.9x EV/EBITDA (NTM; see Exhibit 3).