Dont Look Now - Scotia Ups Target to $20Rating Sector Perform
1-Yr. Target C$20.00
AD.UN-T C$16.97
1-Yr. Return 25.2%
Div. (NTM) $1.24
Div. (Curr.) $1.24
Yield (Curr.) 7.3%
Good Start to 2021 on the Operational Side
OUR TAKE: Slightly Positive.Alaris kicked off 2021 nicely with results coming in slightly ahead of expectations.
Although nothing appears imminent, the likely redemption of Kimco (US$70M-US$80M) and Federal Resources (FED; US$75M-US$85M) will provide Alaris with ample liquidity to deploy capital into new opportunities without requiring further equity issuances. In addition, management believes it has likely "pre-spent" some of this pending redemption capital that will mitigate any reinvestment risk. We view the Kimco redemption as positive given that it has been under-productive capital for some time, and with only a small distribution, it is not likely to materially impact AD's payout ratio. The FED investment has been very successful and its early redemption would have more of an impact on EBITDA and the payout ratio, depending on the time lag for reinvestment. We would expect Alaris to initially deploy the ~C$200M from the redemptions to pay down debt levels. That said, given the robust private equity market, Alaris should have no trouble finding attractive investment opportunities without a lengthy delay. Increasing target price to $20.00, but maintaining our SP rating. KEY POINTS Normalized EBITDA/sh of $0.71 came in slightly ahead of the Street at $0.69 and our estimate of $0.68, and was up ~22% y/y mainly due to recent capital deployment activity. NCOA/sh of $0.66 also came in ahead of our forecast. Alaris sees deal flow coming in at a record pace with multiples at an all-time high amid fierce competition. That said, management believes that AD's unique deal structure (using preferred shares, and of late, a small amount of common equity) has made it an attractive partner and allowed it to win bids. Several of AD's investments are active in their acquisition processes, which may require additional follow-on capital from Alaris. With respect to its investment in Planet Fitness, management believes the company is on track to resume its full distributions in July, with the catchup of missed payments starting in January 2022. That said, the only risk the team sees is if there are additional COVID-related disruptions to Planet Fitness' operations in some key states
Exhibit 1: AD's investments have sustained their solid performance, with the portfolio remaining in good health. Of its 20 investments, only ccComm's ECR falls below 1.0x, while Planet Fitness is the only investment with an ECR of 1.2x to 1.5x. Alaris has seven investments in the 1.5x to 2.0x range, with the remaining eight boasting an ECR greater than 2.0x
Exhibit 2: In Q1/21, AD experienced a total increase in its FV of investments of ~$5.5M, as well as a bad debt recovery of $4M from Kimco relating to A/R and promissory notes due from the company that were previously written off. Post Q1/21, Kimco also repaid US$4M of the total US$18.3M of accrued long-term A/R and promissory notes due to AD.
Exhibit 3: Alaris is on pace to deploy record capital this year after a robust start to the year. With ~C$200M of liquidity likely to be made available this year from the pending redemptions of Kimco and Federal Resources, we believe redeploying even parts of that capital would easily put Alaris in record territory
Exhibit 4: Stock is currently trading at 7.7% our NCOA/EV (NTM) Yield, roughly in line with its three-year average, but a bit above its average on EV/EBITDA (NTM) basis at 9.4x. Redeploying capital from potential redemptions without a lengthy lag and continued demonstration of the health of its investment portfolio are likely to help support the next leg up in valuation
Exhibit 5: Normalized EBITDA came in slightly ahead of expectations, driven by slightly lower-than-expected opex. This was up ~22% y/y mainly due to the recent investment activity and follow-on contributions. Sequentially, normalized EBITDA was down ~5% q/q mainly due to the dilution from the recent equity issuance as total normalized EBITDA improved ~7% q/q.
Exhibit 6: Coming out of the quarter, we have made some changes to our estimates, which include: 1) revising our redemption values for Kimco and Federal Resources based on management’s updated expectations and adjusting our capital deployment forecast based on the revised amounts; 2) fine-tuning trajectory of opex; and 3) revised f/x assumptions