Scotia Analysis (Ups to $21)Fundamentals Remain Solid; Avoiding Any Negative Surprises Key to Sustained Investor Confidence
Sorry - i cant seem to ever copy over the Exhibit Graph and Table presentations. But the table of individual company coverage ratios is getting more and more impressive. EXHIBIT ! - which i will try to put at the very end.. I still have not heard C.call yet on the replay - (busy yesterday and missed it)
Rating Sector Perform
1-Yr. Target C$21.00
AD.UN-T C$16.74
1-Yr. Return 33.5%
Div. (NTM) $1.35
Div. (Curr.) $1.32
Yield (Curr.) 7.9%
OUR TAKE: Positive. Alaris reported solid second-quarter results that came in ahead of expectations. Management has executed well on its strategic priorities to help Alaris navigate through the pandemic and clean up some challenged investments. AD's investment portfolio is in great shape, the company has deployed capital at a record pace in the past 12 months, announced a 6.5% distribution increase this quarter, and a recovering global economy is likely to further boost some of its smaller investment companies. We believe avoiding any negative surprises will be the key for the stock to outperform over the coming 12 months as investor confidence returns, especially with a new CFO expected to be in place prior to year-end. Management noted that the capital deployment pipeline remains fluid, yet competitive, with Alaris a finalist on a couple of fronts. The team believes it has record follow-on investment opportunities within its portfolio. Increasing target price to $21.00 (was $20.00), but maintaining our SP rating. KEY POINTS Normalized EBITDA/sh of $0.72 came in ahead of the Street and our estimate of $0.66. The beat was mainly driven by a higher-than-forecasted top-line as opex came in line. Federal Resources (FED) and Kimco are continuing to evaluate the possibility of a full, or partial redemption. While nothing remains imminent, management updated the expected redemption value for Kimco to US$60M to US$70M (vs US$70M to US $80M last quarter and US$53M to US$75M initially). The slight decline was a result of Kimco repaying US$8M of amount outstanding to AD. FED's redemption value is now estimated to be between US$80M (vs US$86M estimated initially). Management has a high degree of confidence that the FED redemption will be completed this year, but there is a bit less certainty around the Kimco one. Compared to Q1/21, 15 partners experienced no change in their ECR, while three companies saw their ratios rising. B&S saw its ratio decline modestly from 1.5x-2.0x to 1.2x-1.5x, but remained above the 1.0x threshold. During the quarter, Alaris added D&M as a partner, whose ECR came in at 1.5x-2.0x. While LMS and B&S had some notable negative FV adjustments, we believe there are no concerns related with the health of the investments at this time and see this as transitory
Exhibit 1: AD's investments have sustained their solid performance, with the portfolio remaining in good health. The weighted average Earnings Coverage Ratio (ECR) now sits at 1.7x. Following the redemption of ccComm earlier this month, all 20 partners have an ECR greater than 1.2x as nine partners have an ECR greater than 2.0x, seven are between 1.5x and 2.0x, and four are between 1.2x and 1.5x.
Exhibit 2: Q2/21 saw the continuation of an upward trend in Fair Value of Investments Per Unit. The sequential increase was largely driven by the addition of D&M, and also benefited from fair value adjustments of $7.6M. The largest increases came from Planet Fitness that increased by $9.3M (US$7.5M), and Federal Resources of $6.7M (US$5.4M), offsetting declines of $6.2M (US$5M) for Brown & Settle, and $4.9M (US$3.9M) for LMS. Source: Company reports; Scotiabank GBM estimates.
Exhibit 3: The pace of capital deployment has been at record levels with $400M over the last twelve months and $260M so far in 2021, with the pipeline remaining very strong. AD has additional capacity from its credit facilities, but we expect the largest source of capital to come from the potential redemption of FED and Kimco in 2H/21. Management estimates the FED redemption could generate US$80M and between US$60-$70M from Kimco in addition to the US$8M of promissory notes from Kimco
Exhibit 4: Stock is currently trading at 7.9% our NCOA/EV (NTM) Yield, in line with its three-year average, but a bit above its average on an EV/EBITDA (NTM) basis at 9.2x. 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/sh of $0.72 came in ahead of the Street and our estimate of $0.66, rising 50% y/y from higher revenue due to the recent capital deployment initiatives to go along with lower opex. The beat was mainly driven by a higher-than-forecasted top-line as opex came in line. NCOA/sh of $0.45 came in line with our forecast and was up 18% y/y
Exhibit 6: Coming out of the quarter, we have made some changes to our estimates, which include: 1) tweaking our royalties and distributions expectations; 2) modestly increasing our capital deployment forecast given the higher-than-expected EBITDA this quarter; 3) fine-tuning trajectory of opex; and 4) revised f/x assumptions.
Risks Key Risks: Financial and operational health of existing partners, risks associated with investing in new partners, dependence on stock price to make attractive acquisition, FX, competition with other investment entities, key personnel, private company-specific risk.