Exchange Income Corp.
(EIF-T) C$40.94
Resuming Coverage Following Debenture Issuance Event
We are resuming coverage following the closing of the convertible debenture issue, which raised gross proceeds of $143.8 million, including the exercise of the overallotment option. We have also adjusted our forecasts to reflect the acquisition of Carson Air, and updated our currency, fuel, and other economic assumptions.
Impact: NEUTRAL
We are maintaining our BUY recommendation and increasing our target to $52.00, from $50.00.
The new debenture has a 5.25% coupon, a seven-year term and a conversion price of $52.70. The proceeds were used to redeem the $69 million outstanding on the 5.25% debenture due in June 2023, with the balance used to repay a portion of the revolving credit facility.
The acquisition of Carson Air for $61 million was financed with $3 million of EIC common shares and the remainder with cash. Carson Air expands Exchange's presence in the air ambulance services market, with a fixed wing operation in B.C. The geographic expansion in a market already familiar to Exchange through several other aviation subsidiaries is a lower-risk deployment of capital, in our view. We believe that the contracts that Carson Air has with the B.C. government are generally 3-5 years in term and that Carson Air has been the incumbent on some for decades, providing a relatively predictable and secure source of revenue. We assume that the return on capital from the acquisition will exceed 15% and that the margin and FCF profile will be accretive to consolidated results.
We believe that Exchange is well-positioned to weather the air travel downturn, given that its relevant exposure is focused on essential domestic travel in northern communities and revenue that is less susceptible to disruptions such as surveillance, search and rescue, and EMS operations. It also has diversification benefits from a large manufacturing segment that is not tied to civil aviation.
TD Investment Conclusion
We believe that Exchange's business portfolio diversification positions it to better navigate through the challenges presented by the COVID-19 pandemic than its less diversified peers. We believe that limited financial obligations over the next two years provide Exchange with more flexibility to withstand the crisis and eventually resume its growth strategy.