Exchange Income Corp.
(EIF-T) C$42.23
Q2/21; Well-Positioned for Any Speed of Recovery Event
After market close on August 12, Exchange reported Q2/21 EBITDA of $81.1 million vs. TD/consensus of $75.1 million/$75.6 million. Adjusted diluted EPS was $0.52 vs. TD/consensus of $0.47/$0.48.
Impact: SLIGHTLY POSITIVE
We are maintaining our BUY recommendation and increasing our target to $53.00, from $52.00. The increased target reflects the shift forward of our valuation period by one quarter and higher 2022 and 2023 EBITDA forecasts. We have made a minor adjustment to our target price methodology, now valuing the FWSAR contract at the same 7.5x EV/EBITDA multiple we use for the rest of the business, but based on what we believe will be the early stages of more normalized EBITDA in 2024 from that contract (Exhibit 3). The FWSAR contract was previously valued using a DCF methodology. Our EBITDA forecasts increase due to the impact of carrying forward a portion of the stronger-than-expected revenue and Aerospace & Aviation margins from Q2/21.
We believe that Exchange's performance throughout the pandemic highlights the ability of the business to support the dividend (5.4% yield) and capital expenditures without degrading the balance sheet, while maintaining the flexibility necessary to capitalize on potential acquisition opportunities. The coverage of maintenance capex and the dividend with cash from operations during one of the most challenging operating periods in history should provide confidence to the market in the normalized earnings and cash flow potential of the overall business, and be positive for long-term valuation multiples.
Exchange's results once again demonstrate the resiliency of its diversified business. We believe that Exchange is one of the best-positioned, aviation-focused companies to weather any resurgence in COVID-19-related restrictions, given its focus on essential travel in northern communities and other sources of aviation revenue that have limited exposure to international passenger travel.
TD Investment Conclusion
We believe that Exchange's overall 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 fixed financial obligations over the next two years provide Exchange with more flexibility to withstand the crisis and eventually resume its growth strategy.