Analyst Upgrade Pointing to an “improving fundamental outlook” and its “leaner, lower-risk business post-restructuring,” iA Capital Markets’ Elias Foscolos upgraded Shawcor Ltd. (
N/A
) in the wake of a recent pullback of almost 25 per cent in its stock from record highs.
The analyst thinks the Toronto-based company now possesses a “much stronger” balance sheet following the US$91.5-million sale of its Products business to Arsenal Capital Partners, a New York-based private equity investment firm.
“In response to challenging conditions in the global energy industry in 2020, SCL took steps to restructure the business which should result in $80-milion of annualized cost savings, the closure of six pipe coating facilities including four that provided low-margin anti-corrosion services for the North American onshore market, and the sale of the Products business,” he said in a research report released Monday. “We believe that these changes were made with medium- to long-term expectations in mind, and that SCL will be able to maintain its global reach, market-leading position and reputation for quality, and ability to win and execute large projects with its right-sized asset base. As such, we believe that SCL is well-positioned to deliver improved profitability over the near term as activity improves.”
“Margins in Pipeline & Pipe Services (PL&PS) have historically significant fixed-cost torque and are dependent on utilization of facilities, and as such have struggled in recent years. This is where we expect to see the most significant impact from restructuring going forward. As composite pipe demand has been weakened by lower oil & gas development in North America, we expect composite tank sales to comprise a greater proportion of segmented revenues in the near term, resulting in a fairly stable segmented margin. We expect A&I to deliver stable margins at approximately the recent historical average. Overall, we believe that SCL will be able to achieve consolidated EBITDA margins within the potential 9-12-per-cent range by 2022.”
Seeing end-market diversification providing “a degree of cash flow defensiveness,” he added: “Since 2013, the proportion of revenues from non-oil & gas operations has increased from 10 per cent to 33 per cent. This is partially due to a decline in oil & gas, but also to growth in the Automotive & Industrial (A&I) business and the addition of composite tanks. These businesses typically generate stable cash flows and provide avenues for growth.”
Also saying he’s “cautiously optimistic” on its international outlook and seeing covenant worries diminished, Mr. Foscolos raised Shawcor to “speculative buy” from “hold” with a $7.50 target. The average target on the Street is $8.18, according to Refinitiv data.
“We believe much of the risk associated with SCL’s stock has been alleviated, and the Company’s leaner, diversified business is well-positioned to deliver improved profitability as global energy investment recovers in the near term,” he said. “We note that we still expect a weak Q1/21, but this should be built into investor expectations.”