TFI International Inc.
(TFII-T) C$115.20
Forecast & Valuation Update Suggests Additional Upside Event
We are updating our forecasts to reflect the closing of the UPS Freight acquisition on April 30, updated economic growth, fuel, and FX assumptions, and other modelling updates.
Impact: NEUTRAL
We are maintaining our BUY recommendation and increasing our target price to C $135.00 from C$125.00. The increase in our target price is due to the use of higher target EV/EBITDA (10.0x, up from 9.0x) and P/E multiple (20.0x, up from 19.0x). The higher multiples are due to the increased exposure to LTL revenue and earnings that TFI will have based on the completion of the UPS Freight transaction. LTL companies generally attract higher valuation multiples, and we believe that the market will increasingly take this into consideration in valuing the overall TFI business. TFI's LTL revenue represents approximately 40% of our 2022 forecast revenue. The net impact of the forecast updates is immaterial to our Adjusted EBITDA and Adjusted EPS forecasts.
We view the acquisition of UPS Freight as a big strategic win for TFI. TFI has a history of acquiring and successfully integrating companies, shedding unprofitable revenue, and focusing on earnings and FCF. We believe that this same formula for success applied to UPS Freight will lead to significant earnings accretion, increased FCF growth, deleveraging, and long-term valuation multiple expansion.
Despite TFI's strong share-price performance year-to-date, we believe that industry pricing, e-commerce growth, opportunities from the DLS acquisition in 2020, and the UPS Freight acquisition in April 2021, along with management's proven attention to margin expansion, FCF, and returns on capital leave further upside potential for shareholders. We believe that continued execution on its proven operational and strategic plan will support its current valuation and help it narrow the discount at which it is trading relative to some other best-in-class trucking companies.
TD Investment Conclusion
We believe that TFI's above-average historical and forecast growth, prudent financial leverage, and track-record of shareholder value creation justify a moderation in the valuation gap with its comparable group. In addition, we believe that the current environment of strong pricing and consumer demand for goods over services should be constructive for the sector over the next 6-12 months